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

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. JEL Classification: D81, I22, H80.

Student debt among University of Latvia graduates: Repayment prospects under income-contingent student loan scheme

“…All incomecontingent student loans have a provision for forgiving the remaining debts of some of the lowest earning borrowers who reach some maximum repayment period or some maximum age with a debt still outstanding (Johnstone, 2006, p. 89). Research using evidence from the UK finds that under the income-contingent student loan scheme, graduates have lower repayment burdens and higher taxpayer subsidies than in a mortgage-type loan system (Migali, 2010). Profiles of higher education graduates with student debt in relation to gender, field of study, and income are discussed in the following section of this paper.…”

Insurance by Government or Against Government? Overview of Public Risk Management Policies

“…There are a number of studies assessing the advantages and disadvantages of conventional education loans and ICLs, see García‐Peňalosa and Wälde (), Chapman (), Johnstone (), Shen (), Eckwert and Zilcha (), Migali (), Hölzl () or Chapman et al . ().…”

“…There are a number of studies assessing the advantages and disadvantages of conventional education loans and ICLs, see García-Peňalosa and Wälde (2000), Chapman (2006), Johnstone (2009), Shen (2010, Eckwert and Zilcha (2012), Migali (2012), Hölzl (2013) or Chapman et al (2014). These studies generally point out that unlike conventional loans by private banks, government-run ICLs protect borrowers from the inability to repay and from default, thus encouraging prospective university students (especially those from disadvantaged groups) to enrol.…”

“…Eckwert and Zilcha () and Migali () argue that the desirability of ICLs vis‐à‐vis conventional loans depends on the combined effect of students’ income uncertainty and risk aversion. In particular, the ICL system is favourable for risk‐averse individuals with high income uncertainty and low prospective incomes, while the conventional loan system is attractive for risk‐neutral individuals with low income uncertainty and high prospective incomes.…”

Modeling income dynamics for public policy design: An application to income contingent student loans

“…Models of earnings dynamics were first proposed in the literature in the late 1970s to capture life cycle dynamics (Lillard and Willis, 1978), and have since been used extensively in the exploration of earnings inequality (Guvenen, 2009;Moffitt and Gottschalk, 2002;Baker and Solon, 2003;Cappellari, 2004;Haider, 2001) and in mi-crosimulation modeling for the projection of social security and public pension schemes, long-term care, social welfare and taxation policy (O'Donoghue, 2001;Caldwell, 1996;Holmer et al, 2010;Toder et al, 2000;Harris and Sabelhaus, 2003). Indeed, the limitations of static earnings functions in the investigation of higher education policy have been recognised by some, with Migali (2012) incorporating stochastic variation in the growth rate of graduate earnings, and dynamic microsimulation of lifetime earnings having been applied to the modelling of higher education finance and ICLs specifically (e.g., Harding, 1995;Flannery and O'Donoghue, 2011). What has not been explored to date, however, is the extent to which ICL policy conclusions are sensitive to the earnings model assumptions used.…”