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Funding Higher Education and Wage Uncertainty : Income Contingent Loan versus Mortgage 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 and higher education is financed through governmental loans, we build a theoretical model to show whether an income contingent loan (ICL) or a mortgage loan (ML) is preferred for higher levels 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. The theoretical model is calibrated using real data on wage uncertainty and considering the features of the UK Higher Education Reform to observe the implications of the switch from a ML to an ICL and the effect of the top-up fees. Different scenarios are simulated according to individual characteristics and family background. We finally extend the initial model to incorporate stochastic changes of income over time.

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File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/publications/2006/twerp_775.pdf
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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 775.

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Length: 43 pages
Date of creation: 2006
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Handle: RePEc:wrk:warwec:775

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Related research
Keywords: Education 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
I22 - Health, Education, and Welfare - - Education - - - Educational Finance
H80 - Public Economics - - Miscellaneous Issues - - - 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. 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)
  4. 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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  5. 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!]
  6. 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)
  7. 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)
  8. 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.
  9. 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)
  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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