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

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  • Migali, Giuseppe

    (University of Warwick)

Abstract

In a world where graduate incomes are uncertain and higher education is financed through governmental loans, we build a theoretical model to show whether an income contingent loan (ICL) or a mortgage loan (ML) is preferred for higher levels 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. The theoretical model is calibrated using real data on wage uncertainty and considering the features of the UK Higher Education Reform to observe the implications of the switch from a ML to an ICL and the effect of the top-up fees. Different scenarios are simulated according to individual characteristics and family background. We finally extend the initial model to incorporate stochastic changes of income over time.

Suggested Citation

  • Migali, Giuseppe, 2006. "Funding Higher Education and Wage Uncertainty : Income Contingent Loan versus Mortgage Loan," The Warwick Economics Research Paper Series (TWERPS) 775, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:775
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    Cited by:

    1. Bruce Chapman & Kiatanantha Lounkaewa, 2010. "Repayment Burdens with US College Loans," CEPR Discussion Papers 647, Centre for Economic Policy Research, Research School of Economics, Australian National University.
    2. Daehwan Kim & Jin-Yeong Kim, 2011. "Valuing Income-Contingent Loans as Path-Dependent Options," Korean Economic Review, Korean Economic Association, vol. 27, pages 273-291.
    3. Daniel Suryadarma & Elza Elmira, "undated". "Pembiayaan Pendidikan Tinggi di Indonesia: Menilai Fisibilitas Sistem Pinjaman Berbasis Potensi Pendapatan," Working Papers 3786, Publications Department.
    4. Ali Ait Si Mhamed & Rita Kaša & Zane Cunska, 2012. "Student debt levels and income of University of Latvia graduates: Prospects for income-contingent loan repayment by the field of studies and gender," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 12(2), pages 73-88, December.
    5. 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.
    6. Higgins, Tim & Sinning, Mathias, 2013. "Modeling income dynamics for public policy design: An application to income contingent student loans," Economics of Education Review, Elsevier, vol. 37(C), pages 273-285.
    7. Rita Asplund & Oussama Ben Adbelkarim & Ali Skalli, 2008. "An equity perspective on access to, enrolment in and finance of tertiary education," Education Economics, Taylor & Francis Journals, vol. 16(3), pages 261-274.
    8. Elza Elmira & Daniel Suryadarma, "undated". "Financing Higher Education in Indonesia: Assessing the Feasibility of an Income-Contingent Loan System," Working Papers 1882, Publications Department.

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    More about this item

    Keywords

    Education Choice ; Risk Aversion ; Uncertainty;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • I22 - Health, Education, and Welfare - - Education - - - Educational Finance; Financial Aid
    • H80 - Public Economics - - Miscellaneous Issues - - - General

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