Scholarships or Student Loans? Subsidizing Higher Education in the Presence of Moral Hazard

Abstract

Student loans, even income-contingent ones, are not optimal. Potential university students with the appropriate characteristics should be offered a scholarship, dependent on both need and merit. The award of the scholarship should be conditional on the choice of university degree, but students with a natural aptitude for studies that do not hold the prospect of a well paid job should not be pushed towards potentially more lucrative ones. The scheme should be financed by a graduate tax that re-distributes from the better paid to the academically more successful. Principal-Agent, Moral Hazard

Keywords: Scholarships, Student Loans, Graduate Tax,

JEL Classification: D82, I28