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Funding Higher Education and Wage Uncertainty: Income Contingent Loan Versus Mortgate Loan

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  • Migali, Giuseppe

    (University of Warwick)

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    Abstract

    In a world where graduate incomes are uncertain (observation of the UK graduate wages from 1993 to 2003) and the higher education is financed through governmental loan (UK Higher Education Reform 2004), we build a theoretical model to show which scheme between an income contingent loan and a mortgage loan is preferred for higher level of uncertainty. Assuming a single lifetime shock on graduate incomes, we compare the individual expected utilities under the two loan schemes, for both risk neutral and risk averse individuals. We extend the analysis for graduate people working in the public sector and private sector, to stress on the extreme difference on the level of uncertainty. To make the model more realistic, we allow for the effects of the uncertainty each year for all the individual working life, assuming that the graduate income grows following a geometric Brownian motion. In general, we find that an income contingent loan is preferred for low level of the starting wage and high uncertainty.

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    File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_740.pdf
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    Bibliographic Info

    Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 740.

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    Length: 58 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:wrk:warwec:740

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    Keywords: Choice ; Risk Aversion ; Uncertainty;

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    1. Nicholas Barr, 1993. "Alternative funding resources for higher education," LSE Research Online Documents on Economics 280, London School of Economics and Political Science, LSE Library.
    2. Christian Belzil & Jörgen Hansen, 2004. "Earnings Dispersion, Risk Aversion and Education," Working Papers 0406, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
    3. Barr, Nicholas, 1993. "Alternative Funding Resources for Higher Education," Economic Journal, Royal Economic Society, vol. 103(418), pages 718-28, May.
    4. Nerlove, Marc L, 1975. "Some Problems in the Use of Income-contingent Loans for the Finance of Higher Education," Journal of Political Economy, University of Chicago Press, vol. 83(1), pages 157-83, February.
    5. Olson, Lawrence & White, Halbert & Shefrin, H M, 1979. "Optimal Investment in Schooling when Incomes are Risky," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 522-39, June.
    6. Mario Padula & Luigi Pistaferri, 2001. "Education, Employment and Wage Risk," CSEF Working Papers 67, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    7. Hogan, Vincent & Ian Walker, 2002. "Education Choice under Uncertainty," Royal Economic Society Annual Conference 2002 103, Royal Economic Society.
    8. Weiss, Yoram, 1972. "The Risk Element in Occupational and Educational Choices," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1203-13, Nov.-Dec..
    9. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September.
    10. Hause, John C, 1974. "The Risk Element in Occupational and Educational Choices: Comment," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 803-07, July/Aug..
    11. Vincent Hogan & Ian Walker, 2003. "Education Choice under Uncertainty and Public Policy," Working Papers 200302, School Of Economics, University College Dublin.
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    Cited by:
    1. Darragh Flannery & Cathal O’Donoghue, 2011. "The Life-cycle Impact of Alternative Higher Education Finance Systems in Ireland," The Economic and Social Review, Economic and Social Studies, vol. 42(3), pages 237–270.

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