The Financial Capacity of German University Graduates to Repay Student Loans

The need for government intervention in higher education may be justified by an underinvestment in higher education due to a capital market failure (Friedman, 1962; Chapman, 2006). Specifically, higher education is costly but banks are unwilling to offer loans to students in the absence of a guarantor because individual private returns to education are uncertain. From an efficiency perspective, there would be efficiency losses without government intervention because talented but financially disadvantaged prospective students would be excluded. From an equity perspective, there would be distributional inequities because people would not have equal access to educational opportunities.