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

Giuseppe Migali

No 609506, Working Papers from Lancaster University Management School, Economics Department

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.

Keywords: Education Choice; Risk Aversion; Uncertainty (search for similar items in EconPapers)
Date: 2011
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http://www.lancaster.ac.uk/media/lancaster-univers ... gHigherEducation.pdf (application/pdf)

Related works:
Journal Article: Funding higher education and wage uncertainty: Income contingent loan versus mortgage loan (2012)
Working Paper: Funding Higher Education and Wage Uncertainty: Income Contingent Loan versus Mortgage Loan (2006)
Working Paper: Funding Higher Education and Wage Uncertainty: Income Contingent Loan versus Mortgage Loan (2006)
Working Paper: Funding Higher Education and Wage Uncertainty: Income Contingent Loan versus Mortgage Loan (2006)
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