Abstract

The use of income contingent loans (ICLs) for Higher Education (HE) students is becoming increasingly prevalent around the world. Using a model of simulated lifetime earnings for graduates, in this paper we show that the impact of the design of ICLs on the magnitude and distribution of government subsidies is highly dependent on the institutional setting. In particular, the average debt level as a share of average earnings is a key determinant of the impact of various policy parameters. The variance of earnings within the graduate population is also shown to be a determinant of ICL taxpayer costs. This paper is the first comparative exercise of impact of the design of ICLs in different settings, and the findings are highly relevant to countries looking to implement or reform their student loan systems.

Highlights

  • The use of income contingent loans (ICLs) for Higher Education (HE) students is an increasingly popular funding solution for governments worldwide

  • We focus on design features from England, Australia, New Zealand – all of which have long-established ICL schemes for Higher Education – and the USA

  • 15 A constraint is that this modelling approach requires high quality panel data. While this is feasible for the UK and Australia, it will not be in many countries

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Summary

Introduction

The use of income contingent loans (ICLs) for Higher Education (HE) students is an increasingly popular funding solution for governments worldwide. As with private or government-backed mortgagestyle loans, ICLs are typically used to alleviate credit constraints for those facing tuition costs Their salient advantage over these alternative funding sources is that they insure individuals against poor labour market outcomes by requiring loan repayment only if they are earning above a certain threshold, thereby removing the risk of large repayment burdens for those on low incomes, and reducing the impact of risk aversion on the participation decision (see Chapman, 2006). Incorporating this insurance results in an inevitable cost, and it is a major challenge for governments to determine how these costs should be split between ICL borrowers and the taxpayer. Alongside these well established systems, several countries including the US, the Netherlands, South Korea and Hungary have recently implemented full or partial ICL systems, while numerous other countries are considering introducing ICL schemes

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