Higher Education Funding – A Portfolio of Loans • Job Talk

Abstract: The key contribution of this article is introducing the advantages of a portfolio into higher education funding in order to develop efficient funding schemes. In higher education funding, credit market loans (CMLs) lead to underinvestment while income-contingent student loans (ICLs) produce overinvestment. The research introduces a ‘portfolio regime’ (PR) that 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) a-la Eckwert and Zilcha that allows students to choose one type of loan but forbids a portfolio. The key insight is that implementation of a PR may improve the efficiency of investment in higher education and the social welfare. Nevertheless, the PR does not maximize the social welfare because of adverse selection into the ICLs program.