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

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>12/2012
<mark>Journal</mark>Economics of Education Review
Issue number6
Volume31
Number of pages19
Pages (from-to)871-889
Publication statusPublished
Early online date4/07/12
Original languageEnglish

Abstract

We propose a simple theoretical model which shows how the combined effect of wage uncertainty and risk aversion can modify the individual willingness to pay for a HE system financed by an ICL or a ML. We calibrate our model using real data from the 1970 British Cohort Survey together with the features of the English HE financing system. We allow for individual heterogeneity by considering different family backgrounds and occupations. We find that graduates from poor families, males and graduates working in the private sector are more willing to pay to switch to an ICL. Using the UK Labour Force Survey we evaluate the distributive effects of our model. We compute the repayment burdens and taxpayer subsidies for average, low and high earnings graduates. The results confirm the important insurance benefits of an ICL compared to a ML, with lower burdens and higher subsidies for poorer graduates.