Loans to fund education and education-related living costs follow models typical of lending but atypical for assets with returns.
In education, contrary to consumption, lenders expect a return on the funded asset, akin to lending on account receivables. Considering how individuals require income to repay their debt lenders would benefit from linking interest rate premia to risk and expected returns.
The most costly education, that would require higher risk premium, produces the highest returns. Pupils borrowing to finance private studies are also typically those with better risk scores whereas those borrowing less to study in public schools are typically those with feeblest scores and relatively lower returns to education.
Changing how guarantees cover banks’ risk premia remains the remit of the guarantors – the public sector. The Brookings Institute suggests another solution.
EUnomics 