Student Loans in a Tiebout Model of Higher Education

A model is presented where universities competitively supply education to mobile students. Students are subject to a liquidity constraint so that tuition must be paid out of pre-university income. It is shown that student loans provided by home jurisdictions will ensure an efficient quality of higher education if loans do not contain any subsidy. If there is income-related debt relief, however, the equilibrium quality of education is inefficiently low. This is because students reduce their expected future income by attending a university offering low quality, and thereby reduce the amount of debt to be repaid.