I implement a basic tool of financial markets—namely, a portfolio—into student loans. In higher education funding, credit market loans (CMLs) lead to underinvestment, while income-contingent loans (ICLs) produce over-investment. This research introduces a ‘portfolio regime’ (PR), which allows students to combine CMLs and ICLs. The model assumes that agents privately invest in higher education after receiving a noisy signal about their future incomes. The article compares a PR with a ‘competition regime’ (CR), which allows students to choose one type of loan but prohibits a portfolio. The key insight is that implementation of a PR may improve the efficiency of investment in higher education and social welfare. Nevertheless, the PR does not maximize social welfare because of adverse selection into ICL programs.
