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

Giuseppe Migali
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Giuseppe Migali: University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

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.

Keywords: Choice; Risk Aversion; Uncertainty (search for similar items in EconPapers)
JEL-codes: D81 H20 L22 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2006
New Economics Papers: this item is included in nep-edu, nep-lab, nep-pbe and nep-sog
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:740

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