An Option for Financial Aid

University Of North Carolina At Chapel Hill, Chapel Hill NC

Investigators

Abstract

This project supports research for an alternative to student loans as a way to finance higher education. The project utilizes the theory behind financial instruments such as call or put options to develop the alternative, an education call option. The education call option is intended to protect students from investing in higher education and then not earning an income substantial enough to afford basic living expenses, loan repayments, or future investment in education. Hence, the option functions as insurance against the risk of investing in higher education. Like any insurance policy, it is important to have a premium and deductible that are economically beneficially to both the policyholder and underwriter. A major objective of this project is to develop analytically tractable methods for pricing the education call option that can be used in practice.