Question

3. Human capital cannot be pledged as an asset that can be seized by a lender in the event that the borrower defaults on a loan; in other words, human capital cannot be used as “collateral.” Does the observation that human capital cannot be collateralized mean that in the absence of government-provided loans interest rates on student loans would be too high, just about right, or too low?

Answer 1

if government doesnot provide loans on student study then the interest on student loan will be too high because of imperfect information. imperfect information on assymetry information or symmetry information. people are not certain that the education or the course for which the student is getting loan is going to get good returns or not. as there is no certainity the banks will charge a high interest rate to compensate there expected loss so the interest rate charged on student loan will be high if not provided by government.