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

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.


Issue Date:
Nov 07 2006
Publication Type:
Working or Discussion Paper
Record Identifier:
http://ageconsearch.umn.edu/record/269745
Language:
English
Total Pages:
43
JEL Codes:
D81; I22; H80




 Record created 2018-03-21, last modified 2018-03-21

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