Free response question

IEO past paper: 2021 International Economics Olympiad, open questions

Different college graduates earn different salaries, even after graduating from the same institution. Some are less successful or lucky (and thus have lower salaries); others don't pursue maximization of their earnings, leaning towards socially-oriented not-for-profit jobs. Even if student loans are available, students may abstain from entering prestigious and expensive colleges, uncertain that they will be able to repay. This may create an inefficient allocation when most risk-loving and not most talented young people get the best education. (And then some of them fail to pay off the loans.) Consider the following alternative to a traditional student loan which intends to solve this inefficiency problem. A student enters college tuition-free, and after graduation, they pay the college a certain percentage of their salary for a fixed number of years. So, a student never has to pay for their education more than they earn after receiving it. The income percentage to be paid is calculated based on an average graduate's salary, so the program should finance itself.