Efficient Funding of Higher Education

I implement a basic tool of financial markets—namely, a portfolio—into student loans.
 

In higher education funding, credit market loans (CMLs) lead to under-investment, 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.

Jel Nos.: I21; I22; I23; I24; I28; D31; H31

Paper in PDF