Essays on the Provision of HE, Student
Loans and Second Chance Policies

Abstract

In many countries including the UK, the higher education (HE) sector is increasingly being
funded by student loans while the level and methods of funding HE continues to be a hotly
debated political topic. This thesis includes four theoretical papers on the provision of HE,
student loans and Second Chance policies and is divided into two parts.
There is evidence of improved labour market performance for mature university students
who completed HE and for workers who succeeded in the labour retraining program. It could
be beneficial for the government to provide a second chance at HE to those who failed their
first chance at HE and to provide a labour retraining program to those who suffered
downward labour mobility. The first part explores how to design a student loan system that
takes into account foreseeable potential HE and labour market failures by extending the
model of Gary-Bobo and Trannoy (2015). Chapter 3 investigates how to optimally provide a
HE system that offers a second chance to all failed students and analyses the impact of such
an optimally provided second chance on inequality. We found the second chance policy
increases the degree of ex-ante inequality and causes the students who failed twice in HE to
be worse off than everyone when old. Chapter 4 investigates how to optimally provide HE
with a labour retraining program and the effect of this program on inequality. Although the
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labour retraining program has increased the degree of ex-ante inequality we found the degree
of ex-post inequality can be decreased but only when the government knows who needs
retraining. Our results suggest that if the government wants to use a labour retraining
program to reduce inequality, it needs to improve its ability to correctly identify which
workers are at risk of downward mobility. Our results in both chapters also support the
findings in the related literature on the usefulness of ICL schemes to fund HE and suggest that
the government cannot charge a separate ordinary loan for using these Second Chance
policies.
Part 2 focuses on the political economy of HE, a relatively underexplored field. Chapter 5
investigates the effect of the design of the constitution on the level of HE spending and
income inequality between the presidential and parliamentary regimes by modifying the
model of Persson, Roland and Tabellini (2000). We show the way the level of HE spending is
determined in the two regimes is fundamentally different because the identity of the residual
claimant of tax revenue is different and this presents a mechanism on how the constitution
of the presidential regimes itself leads to a higher level of income inequality compared to the
parliamentary regimes. In the UK and the US, the rising tuition fees and the building up of
student loan debt have caused concern over its potential default. Chapter 6 examines
whether a government could be motivated to increase the level of student loans and tuition
fees when facing political uncertainty and a polarised society in theory by modifying the
model of Persson and Svensson (1989). Our results agree with the insights in the related
literature on the incentives to use public investment to influence the decision of the future
government but we do not predict the incumbent government must increase or decrease the
level of investment under uncertain re-election prospects.