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The student funding dilemma

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  • Pernagallo, Giuseppe

Abstract

Access to higher education in several countries still has many barriers, mainly represented by the high cost of tuition fees. Given the importance of higher education for innovation and economic growth, this paper analyzes the best financing scheme for needy students. Using an asymmetric information model, the paper shows that student loans involve a moral hazard problem with sub-optimal levels of effort and quality of education, and are socially inefficient and inequitable. On the other hand, merit-based scholarships and need-based grants pose no moral hazard, are socially efficient, and are no more expensive than alternative financing schemes. In particular, while scholarships may be more cost-effective than grants, the latter allow to achieve directly the first best. The paper also examines loan forgiveness policies and talent funding. The results of the model are supported by a large strand of empirical literature.

Suggested Citation

  • Pernagallo, Giuseppe, 2024. "The student funding dilemma," The Journal of Economic Asymmetries, Elsevier, vol. 30(C).
    • Handle: RePEc:eee:joecas:v:30:y:2024:i:c:s1703494924000185
    DOI: 10.1016/j.jeca.2024.e00369
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    More about this item

    Keywords

    Economics of education; Human capital; Information economics; Information asymmetry; Student loans;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G2 - Financial Economics - - Financial Institutions and Services
    • I23 - Health, Education, and Welfare - - Education - - - Higher Education; Research Institutions

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