IncomeContingentLoans

1、Policy ExchangeIn come Contingent Loa ns: The Future of Un iversity FinanceProf. Steve n Schwartz: In troductory Remarks to be Delivered at Policy Excha nge Debate, 27th Jan uary 2005In my opening remarks, I want to make three points.First, I want to expla in why it is fair for stude nts to pay at l

2、east part of the costs of their higher education. And why it is unfair for them not to pay any fees at all.Second, I will show that the best way for students to make a contribution to their educatio n is through an in come con ti ngent loa n.And third, I will describe some flaws in the government s

3、plans for university fees,and I will show how these can be fixed.First, why should stude nts pay fees? After all, the public ben efits from hav ing highly educated individuals. Lawyers advanee the cause of freedom, doctors liberate the sick from the scourge of disease, and teachers prepare the next

4、gen erati on for citize nship. Because the public ben efits, why should n t taxpayerspay alL the costs of higher educati on?The answer is that those who graduate from university also receive significant private ben efits. Graduates get better jobs, make more money and wield more in flue nee tha n no

5、n-graduates. And these ben efits are greatest for those who atte nd our most competitive uni versities.This would not matter if higher education were equally distributed across the populati on. But it is not. Childre n of professi onal pare nts are six times more likely to go to university than chil

6、dren from working class families.This makes free higher educati on highly regressive. The cost, which is paid by all taxpayers in cludi ng low-i ncome earners goes main ly to those who come from high-i ncome families and who will make higher tha n average in comes after they graduate. For this reas

7、on, free higher educati on is un fair.And this is why all En glish speak ing coun tries, and many Europea n on es, have started chargi ng at least partial fees to uni versity stude nts.There are two main ways to collect these fees. The most well known is the system of up-front fees combined with stu

8、dent loans that is used in the USA. Because commercial banks will not un derwrite loa ns for educati on there is no collateral that can be sold in the eve nt of default gover nments wind up guara ntee ing stude nt loa ns.The American approach to financing universities has many shortcomings.Perhaps t

9、he most serious is that student loans are like personal loans or mortgages. They must be repaid over a pre-determined schedule at a fixed amount each month. These repayments are not income-related. If the economy turns sour, and graduates find themselves out of work, they may default on their loans

10、thereby affecting their credit rating and their chances of obtaining a mortgage down the track.The system is not a good one from the government s poin-ot f-view either. Thereis considerable scope for moral hazard. For example, commercial banks have little incentive to try to collect loans from stude

11、nts; it is easier to invoke the government guarantee. This makes the scheme expensive for taxpayers.These problems are not new. They were recognised as long ago as 1955 in an article by the Nobel Laureate, Milton Friedman. Friedman srecommended solution was the income contingent loan, in which the r

12、epayment of university fees depends on a student sfuture income rather than on his or her family income.It took decades for anyone to take up Friedman sidea, but in 1989 Australia became the first country in the world to put in place an income contingent loan scheme for university fees. Australian s

13、tudents pay no fees to attend university but once their income reaches a certain threshold, they repay their fees through a surcharge on their income tax. With a few changes, this is the system that England has adopted to begin in 2006.With income contingent loans, there is no risk of anyone receivi

14、ng a poor credit rating because of default. This is because graduates who get laid off, those who take time off to raise families, and those who do not benefit from their degree by getting a well-paid job do not have to make any payments. The government assumes the risk of a student losing a job or

15、never getting a job in the first place.The income contingent loan system is equitable, fair and it is efficient becauseit uses the existing tax system to collect fees.The Australian experience over the last 15 years shows that income contingent loans do not deter students from low-income families fr

16、om taking up higher education. And it has brought much needed new money into universities.The fee system adopted for the UK has similar positive characteristics, but it also has a few anomalies. Despite the Australian experience, we in England seem to believe that an income contingent loan system wi

17、ll deter working class students from going to university.So, in our system there will be a fee remission for students from low-income families.This is a deeply unfair.To see why, imagine two students, one from a working class family and one from a professional background. They both attend the same l

18、aw school and go to work for the same city law firm and make exactly the same salary. But one will have to repay her fees and the other will not.In other words, a wealthy lawyer who does not require any subsidy will receive one because her family had a low income many years earlier. This is regressi

19、ve because low-income taxpayers will be subsidising a high-income lawyer. It is unfair.A second problem with the proposed system is that the fees have been cappedat a low level. Most uni versities will be charg ing the full3000 and students willbe prevented from investing any more in their education

20、 even if they wish to. This is a lost opportunity to introduce price signals into the higher education marketplace.A third problem with the governments phlaenlaisckt of any discount for up-frontpayments. The government has greatly increased the cost of the scheme by not permitting discounted up-fron

21、t fee payments. Australia found many people willing to take up this opportunity, which greatly decreased the cost of the scheme to the taxpayer.One final problem. Every university in England has a quota of students given to it by the funding council. Universities who enrol more than their quota of s

22、tudents do not receive any extra money. And if they exceed their quota by more than 5 percent, they can be fined.These quotas have nothing to do with student demand they are simply historical. The number of places a university gets is determined by the number it received the year before. Under the q

23、uota system, students are often turned away from their preferred university because the university has run out of places. Even if the university has room and would like to take more students, it is not allowed to do so.Rejected students must go to their second choice institution or third and so on until they find a place. This system protects unpopular courses and institutions.Students wind