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

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  • Migali, Giuseppe

    (University of Warwick)

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.

Suggested Citation

  • Migali, Giuseppe, 2006. "Funding Higher Education and Wage Uncertainty: Income Contingent Loan Versus Mortgate Loan," The Warwick Economics Research Paper Series (TWERPS) 740, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:740
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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/2008/twerp_740.pdf
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    References listed on IDEAS

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    1. Eaton, Jonathan & Rosen, Harvey S, 1980. "Taxation, Human Capital, and Uncertainty," American Economic Review, American Economic Association, vol. 70(4), pages 705-715, September.
    2. Barr, Nicholas, 1993. "Alternative Funding Resources for Higher Education," Economic Journal, Royal Economic Society, vol. 103(418), pages 718-728, May.
    3. Christian Belzil & Jörgen Hansen, 2002. "Earnings Dispersion, Risk Aversion and Education," CIRANO Working Papers 2002s-20, CIRANO.
    4. 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.
    5. Hogan, Vincent & Ian Walker, 2002. "Education Choice under Uncertainty," Royal Economic Society Annual Conference 2002 103, Royal Economic Society.
    6. Barr, Nicholas, 1993. "Alternative funding resources for higher education," LSE Research Online Documents on Economics 280, London School of Economics and Political Science, LSE Library.
    7. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    8. Vincent (Vincent Peter) Hogan & Ian Walker, 2003. "Education choice under uncertainty and public policy," Working Papers 200302, School of Economics, University College Dublin.
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    10. 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 157-183, February.
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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.

    More about this item

    Keywords

    Choice ; Risk Aversion ; Uncertainty;

    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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