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Funding higher education and wage uncertainty: income contingent loan versus mortgage loan

By Giuseppe Migali

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

Topics: HG, LB2300
Publisher: University of Warwick, Department of Economics
Year: 2006
OAI identifier: oai:wrap.warwick.ac.uk:1424

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