Higher education funding: The value of choice

TL;DR

This paper argues that allowing students to choose diversified loan portfolios can reduce their financial burden and improve overall loan conditions, suggesting a policy shift in higher education funding.

Contribution

It introduces a model showing that student loan portfolios lead to benefits for borrowers and better loan terms, advocating for increased governmental choice in funding options.

Findings

Students diversify their loans when given portfolio options.

Diversification benefits both students and loan terms.

Policy implications favor increased choice in student funding.

Abstract

An alternative to the dependence on traditional student loans may offer a viable relief from the tremendous burden that those loans usually incur. This article establishes that it is desirable for governmental intervention to grant students 'more choice' in their funding decisions by allowing them to have portfolios, mixtures of different types of loans. To emphasize this point, a model is presented of a situation where students invest in higher education while facing uncertainty about their individual earning potential. The model reveals that when students are allowed to have portfolios of loans, some of them indeed take the opportunity and diversify their loans, benefiting themselves, but also improving the loan terms of other students. Therefore, when governments organize student loans, they should consider providing students with more choice in their funding decisions.