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Income Contingent Loans for Higher Education: International Reform

Bruce Chapman ()

No 491, CEPR Discussion Papers from Centre for Economic Policy Research, Research School of Economics, Australian National University

Abstract: It is well known that higher education financing involves uncertainty and risk with respect to students’ future economic fortunes, and an unwillingness of banks to provide loans because of the absence of collateral. It follows that without government intervention there will be both socially sub-optimal and regressive outcomes with respect to the provision of higher education. The historically most common response to this market failure — a government guarantee to repay student loans to banks in the event of default — is associated with significant problems. Income contingent loans offer a possible solution. Since the late 1980s ICLs have been adopted in, or recommended for, a significant and growing number of countries, and it is this important international policy reform that has motivated the Chapter. An ICL provides students with finance for tuition and/or income support, its critical and defining characteristic being that the collection of the debt depends on the borrowers’ future capacity to pay. ICL have two major insurance advantages for borrowers over more typical arrangements: default protection and consumption smoothing. With reference to countries with both successful and unsuccessful ICL, the paper illustrates that the operational and design features of such schemes are of fundamental importance with respect to their potential efficacy. It also seems to be the case that in many institutional and political environments there is not yet the administrative sophistication to make ICLs viable, although for reasons documented this is unlikely to be the case for the vast majority of OECD countries. For one country, Australia, there is now a significant amount of research into the consequences of an ICL, and the evidence is explored in some detail. The investigation into the Australian experience helps in the development of a research agenda.

Keywords: income contingent loans; student loans; higher education financing; HECS (search for similar items in EconPapers)
JEL-codes: I00 I20 I21 I22 I28 J2 J24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-edu
Date: 2005-06
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