Migali, Giuseppe (2006) Funding higher education and wage uncertainty: income contingent loan versus mortgage loan. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers.

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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.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance L Education > LB Theory and practice of education > LB2300 Higher Education
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Education, Higher -- Finance, Mortgages, Income-contingent loans, Wages -- Effect of education on, Risk assessment
Series Name:	Warwick economic research papers
Publisher:	University of Warwick, Department of Economics
Place of Publication:	Coventry
Date:	23 January 2006
Number:	No.740
Number of Pages:	59
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Adapted As:	Migali, G. (2006). Funding higher education and wage uncertainty: income contingent loan versus mortgage loan. [Coventry] : University of Warwick, Economics Department. (Warwick economic research papers, no.775).
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URI:	http://wrap.warwick.ac.uk/id/eprint/1454

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