Higher Education Funding, Welfare and Inequality in Equilibrium

This paper analyses quantitatively the effect that higher education funding policies have on welfare and inequality. We evaluate five different higher education financing schemes with a heterogeneous agent model in continuous time. When educational costs are small, differences in outcomes amongst systems are negligible. As the cost of education and the share of debtors in society rises, it becomes preferable to fund education with subsidies, instead of student loans, as there are pecuniary externalities that arise with debt. Although subsidies can generate large steady state welfare gains, transition costs can be large enough to justify the status quo.