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Higher education funding, welfare and inequality in equilibrium

Gustavo Mellior

Studies in Economics from School of Economics, University of Kent

Abstract: This paper analyses theoretically and quantitatively the effect that different higher education funding policies have on welfare (on aggregate and at the individual level) and wealth inequality. A heterogeneous agent model in continuous time, which has uninsurable income risk and endogenous educational choice is used to evaluate five different higher education financing schemes. Educational investments can be self financed, supported by government guaranteed student loans - that may come with or without income contingent support - or be covered by the public sector. When educational costs are small, differences in outcomes amongst systems are negligible. On the other hand, when these costs rise to realistic levels we see that there can be large gains in welfare and significant drops in inequality by moving to a system with more public sector support. This support can come in the form of tuition subsidies and/or income contingent student loans. However, as the cost of education and the share of debtors in society gets larger, it is preferable to increase public support in the form of tuition subsidies. The reason is that there is a pecuniary externality of debt that gets magnified when student loans become excessive. While I identify large steady state welfare gains from more public sector financing, I show that the transition costs can be large enough to justify the status quo.

Keywords: Incomplete markets; Higher education funding; Human capital (search for similar items in EconPapers)
JEL-codes: D52 D58 E24 I22 I23 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-dge and nep-mac
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