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

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Author Info
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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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
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Handle: RePEc:wrk:warwec:740

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Related research
Keywords: Choice ; Risk Aversion ; Uncertainty;

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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Belzil, Christian & Hansen, Jörgen, 2002. "Earnings Dispersion, Risk Aversion and Education," IZA Discussion Papers 513, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. Barr, Nicholas, 1993. "Alternative Funding Resources for Higher Education," Economic Journal, Royal Economic Society, vol. 103(418), pages 718-28, May. [Downloadable!] (restricted)
  3. 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.. [Downloadable!] (restricted)
  4. Chapman, B., 1998. "Some Financing Issues for Australian Higher Education Teaching," CEPR Discussion Papers 384, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University.
  5. 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. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Chapman, Bruce, 1997. "Conceptual Issues and the Australian Experience with Income Contingent Charges for Higher Education," Economic Journal, Royal Economic Society, vol. 107(442), pages 738-51, May. [Downloadable!] (restricted)
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  8. 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. [Downloadable!]
  9. 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.. [Downloadable!] (restricted)
  10. Hogan, Vincent & Ian Walker, 2002. "Education Choice under Uncertainty," Royal Economic Society Annual Conference 2002 103, Royal Economic Society. [Downloadable!]
  11. Vincent Hogan & Ian Walker, 2003. "Education Choice under Uncertainty and Public Policy," Working Papers 200302, School Of Economics, University College Dublin. [Downloadable!]
  12. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-15, September. [Downloadable!] (restricted)
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  1. Rita Asplund & Oussama Ben-Abdelkarim & Ali Skalli, 2007. "An Equity Perspective on Access to, Enrolment in and Finance of Tertiary Education," Discussion Papers 1098, The Research Institute of the Finnish Economy. [Downloadable!]
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