Chapter

Designing Student Loans

Nicholas Barr

in The Welfare State as Piggy Bank

Published in print May 2001 | ISBN: 9780199246595
Published online November 2003 | e-ISBN: 9780191595936 | DOI: http://dx.doi.org/10.1093/0199246599.003.0012
 Designing Student Loans

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Imperfect information, risk, and uncertainty create capital market imperfections. As a result, conventional loans, i.e. mortgage‐type loans, are both inefficient and inequitable. Income‐contingent loans – i.e. loans with repayments calculated as x % of the borrower's subsequent earnings until he or she has paid off the loan – address these capital market imperfections by reducing the risks facing borrowers and lenders. Though its form and extent may vary, public involvement is necessary to collect income‐contingent loan repayments, and perhaps also to provide the loan capital.

Keywords: borrowers; capital market imperfections; imperfect information; income‐contingent loans; lenders; mortgage‐type loans; risk; student loans; uncertainty

Chapter.  4663 words.  Illustrated.

Subjects: Public Economics

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