Wednesday, July 28, 2010

Income Contingent Student Loans

The High level Strategy Group, chaired by Colin Hunt, is due (over-due, in fact) to report on a strategy for Higher Education in Ireland. One issue that may be confronted is the question of the re-introduction of fees. Rather than a return to the old system a more likely scenario is some form of income contingent loan. The Strategy Group lacks any expertise in the economics of education, as far as I can see, and it is unclear that they consulted anyone with such expertise. The paper below would be a good start though.
Income Contingent Loans for Higher Education: international reforms
Bruce Chapman
Handbook of the Economics of Education, vol 2, chap 25
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 chapter 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.


Martin Ryan said...

Ironically enough, it is one of Ireland's economists from a previous generation (Tony Barlow) who laid much of the foundation for how we think about income contingent student loan schemes. He directly or indirectly (I am still investigating the history of this area) influenced subsequent scholars who worked on the financing of higher education, such as Bruce Chapman and Nicholas Barr.

There was an obituary on Barlow published in the Irish Times a couple of months ago, which can be read here:

"Barlow was full of the new thinking that was beginning to sweep through the academic subject of economics. He was a pioneer at UCC in the teaching of labour economics, managerial economics and quantitative methods in economics...

The Financing of Third Level Education in Ireland (published by the ESRI) reviewed the equity and efficiency of systems of third-level educational finance and in particular looked at a scheme of student loans...

...His ground-breaking contribution in this area was acknowledged by Prof Bruce Chapman, a leading educational economist in Australia..."

Kevin Denny said...

Yes indeed. I only met Tony once, but its a sad loss indeed. I am not sure that he was fully appreciated.

Colm Harmon said...

Chapman was brought over....!