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Efficient Funding of Higher Education

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  • Hatsor, Limor

Abstract

I implement a basic tool of financial markets—namely, a portfolio—into student loans. In higher education funding, credit market loans (CMLs) lead to underinvestment, 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.

Suggested Citation

  • Hatsor, Limor, 2014. "Efficient Funding of Higher Education," Foerder Institute for Economic Research Working Papers 275827, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275827
    DOI: 10.22004/ag.econ.275827
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    1. Robert J. Barro, 1998. "Determinants of Economic Growth: A Cross-Country Empirical Study," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522543, April.
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    3. Checchi,Daniele, 2008. "The Economics of Education," Cambridge Books, Cambridge University Press, number 9780521066464, October.
    4. Erik Hanushek & F. Welch (ed.), 2006. "Handbook of the Economics of Education," Handbook of the Economics of Education, Elsevier, edition 1, volume 2, number 2, June.
    5. Nicholas Barr & Iain Crawford, 1998. "Funding Higher Education in an Age of Expansion," Education Economics, Taylor & Francis Journals, vol. 6(1), pages 45-70.
    6. Chapman, Bruce, 2006. "Income Contingent Loans for Higher Education: International Reforms," Handbook of the Economics of Education, in: Erik Hanushek & F. Welch (ed.), Handbook of the Economics of Education, edition 1, volume 2, chapter 25, pages 1435-1503, Elsevier.
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    Cited by:

    1. Hatsor, Limor, 2015. "Higher education funding: The value of information," Economics Letters, Elsevier, vol. 137(C), pages 230-233.

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