Student Loan Financing Clause Samples

Student Loan Financing. First, consider that the university offers a conventional upfront-fee contract together with its offer of admission to the student. In this case, the student finances her education (i.e., the upfront fee pD) using a student loan. We use subscript D to represent that the student financed her education using a debt. The student’s expected utility from accepting the university’s offer of admission is (1) The first term represents that with probability a + keD the student expects an income y = 1, out of which she repays pD to her lender. The second term represents that the student expects to not succeed on the job market with probability 1 − (a + keD) in which case she earns y = 0 and is unable to repay her debt. In this case, she incurs an additional disutility δ for every unit of borrowed funds. The third term is simply the student’s cost of effort. We 1+δ assume the discount factor is one. In addition, the condition 0 < k < r 2(1−a)−δ(1−a)2 ensures (1) the probability of student’s success on the job market is bounded between a and 1, and (2) both student’s and university’s maximization problems have real solutions.8 If the student accepts the university’s offer of admission, the university receives the entire fee pD upfront from the student. Therefore, the university expects to receive the fee pD that it sets for education if the student accepts the offer of admission, and nothing otherwise. The university’s payoff does not depend on whether the student is actually successful on the job market. The university maximizes its expected payoff πD by setting a fee pD that leaves the student indifferent between accepting and rejecting the university’s offer of admission. We assume the student accepts the offer of admission if she is indifferent between accepting and rejecting the offer. Note that in our main analysis, we assume the university’s objective is to maximize its expected profit. In a model extension, presented in Section 4.2, we assume the university cares about both its expected monetary payoff and student surplus. The timing of actions (also shown in Figure 1) is as follows. The university moves first 8The lower bound of a for the probability of student’s success on the job market in needed to ensure the student’s equilibrium effort e∗D > 0. and sets the price pD that is to be paid in full by the student when accepting its offer of admission. The student decides whether to accept the university’s offer. If the student accepts the offer, she borrows fu...