Funding Higher Education and Wage Uncertainty: Income Contingent Loan Versus Mortgate Loan
AbstractIn 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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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 740.
Length: 58 pages
Date of creation: 2006
Date of revision:
Choice ; Risk Aversion ; Uncertainty;
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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-03 (All new papers)
- NEP-EDU-2006-06-03 (Education)
- NEP-LAB-2006-06-03 (Labour Economics)
- NEP-PBE-2006-06-03 (Public Economics)
- NEP-SOG-2006-06-03 (Sociology of Economics)
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