Efficient Funding of Higher Education

Working Paper #13-14

החוקר.ת מאחורי המחקר

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


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