This paper is the result of a study done for the Human Resources and Skill Development of Canada (HRSDC), and aim at providing answers to several questions of importance for policy makers, on the relationship between the Student Loan Program in Canada and its effects on labor productivity.
The paper provides a general equilibrium model of educational choices and skill development, under different conditions that mimic the current and alternative policies available in Canada. The simulations based on the calibrated model, clearly show that all the policies have a limited long-run impact on productivity and GDP, compared to their cost. The limited effect is due primarily to the fact that in the long run the general equilibrium effects on the wage premium dominate and create a disincentive to invest in higher education for marginal students. The short run effects are instead more significant. Interestingly though, the last two policies, which target high ability students, are more effective in terms of productivity, however they also increase inequality.