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

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  • Migali, Giuseppe
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 Mortgage Loan," Economic Research Papers 269633, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269633
    DOI: 10.22004/ag.econ.269633
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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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Elza Elmira & Daniel Suryadarma, "undated". "Financing Higher Education in Indonesia: Assessing the Feasibility of an Income-Contingent Loan System," Working Papers 1882, Publications Department.
    7. Elza Elmira & Daniel Suryadarma, "undated". "Pembiayaan Pendidikan Tinggi di Indonesia: Menilai Fisibilitas Sistem Pinjaman Berbasis Potensi Pendapatan," Working Papers 3786, Publications Department.
    8. 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.

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    More about this item

    Keywords

    Financial Economics; Labor and Human Capital; Risk and 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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