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Funding Higher Education and Wage Uncertainty: Income Contingent Loan versus Mortgage Loan

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  • G Migali

Abstract

Individual risk aversion and riskiness of investment in higher education are combined with two alternative loan-based financing systems, income contingent loans (ICL) and mortgage loans (ML), to investigate the effects on graduate lifetime expected utilities. We deal explicitly with the presence of hidden subsidies due to discounting, which is one of the main drawbacks of an ICL. The theoretical model has been calibrated using real data on graduate earnings and their volatility, together with the features of the English HE financing system, which has recently switched from a ML to an ICL system. Higher uncertainty in earnings in general makes an ICL the preferred system for risk averse individuals, while risk neutral individuals prefer mortgage loans.

Suggested Citation

  • G Migali, 2011. "Funding Higher Education and Wage Uncertainty: Income Contingent Loan versus Mortgage Loan," Working Papers 609506, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:609506
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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.
    2. Higgins, Tim & Sinning, Mathias, 2013. "Modeling income dynamics for public policy design: An application to income contingent student loans," Economics of Education Review, Elsevier, vol. 37(C), pages 273-285.
    3. Rita Asplund & Oussama Ben Adbelkarim & Ali Skalli, 2008. "An equity perspective on access to, enrolment in and finance of tertiary education," Education Economics, Taylor & Francis Journals, vol. 16(3), pages 261-274.
    4. Bruce Chapman & Kiatanantha Lounkaewa, 2010. "Repayment Burdens with US College Loans," CEPR Discussion Papers 647, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    5. Daehwan Kim & Jin-Yeong Kim, 2011. "Valuing Income-Contingent Loans as Path-Dependent Options," Korean Economic Review, Korean Economic Association, vol. 27, pages 273-291.
    6. Elza Elmira & Daniel Suryadarma, "undated". "Financing Higher Education in Indonesia: Assessing the Feasibility of an Income-Contingent Loan System," Working Papers 1882, Publications Department.
    7. Elza Elmira & Daniel Suryadarma, "undated". "Pembiayaan Pendidikan Tinggi di Indonesia: Menilai Fisibilitas Sistem Pinjaman Berbasis Potensi Pendapatan," Working Papers 3786, Publications Department.
    8. Ali Ait Si Mhamed & Rita Kaša & Zane Cunska, 2012. "Student debt levels and income of University of Latvia graduates: Prospects for income-contingent loan repayment by the field of studies and gender," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 12(2), pages 73-88, December.

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    More about this item

    Keywords

    Education Choice; Risk Aversion; Uncertainty;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • H80 - Public Economics - - Miscellaneous Issues - - - General

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