Income Contingent Loans ― Theory, Practice and Prospects

As an income contingent loans bill is considered by the US Congress, income contingent loans (ICL) have risen to the forefront of economic discourse. ICLs are collected through the income taxation system and are repaid only when future incomes exceed a specified level. ICLs were first introduced in Australia in 1989 to help college students finance their tuition costs, and since then many countries have followed this policy approach. Bruce Chapman, Timothy Higgins and Joseph E. Stiglitz along with a host of internationally recognised experts who have been instrumental in impacting national policy in this field, explore the theory of ICLs, and the prospect of applying the basic principles to many other potential areas of social and economic policy such as paid parental leave; recompensing poor countries for skilled migrant emigration; legal aid for civil disputes; business innovation for small and medium enterprises; out-of-pocket health care expenditure needs; and for periods of unemployment.

The text describes an alternative approach to ICLs, which takes the form of human capital contracts or graduate taxes, as well as examining hybrid schemes that combine the attractive aspects of both arrangements. Case studies are used to examine the prospects for ICLs for higher education in Malaysia, Germany, Thailand, Chile and Colombia, and there is discussion of the barriers for adoption of ICLs in countries that lack efficient institutions for debt collection.

A key message from the contributions is that in countries with appropriate institutions for taxation administration, there are considerable transactional efficiencies associated with ICLs. These efficiencies, combined with the improvements in risk and incentives that well-designed ICL programs can provide, suggest that such programs can play an important role in a modern welfare state.

Bruce Chapman is Professor of Economics and Director, Policy Impact at the Crawford School of Public Policy at the Australian National University. He is widely regarded as the architect of the Australian income contingent loan scheme for higher education. He has extensive experience in public policy, including as a senior economic advisor to Prime Minister Paul Keating, 1994–96, and as a higher education financing consultant to the World Bank and the governments of Thailand, Papua New Guinea, Mexico, Canada, the UK, Ethiopia, Rwanda, Malaysia, Colombia, the US, Chile and China.

Timothy Higgins is Senior Lecturer and researcher in Actuarial Studies at the Australian National University. Prior to academia, he was in the Department of Treasury, where he was involved in the design and costing of public policy, including the Australian income contingent loan scheme. He is a Fellow of the Institute of Actuaries of Australia and consultant to the Australian government. He has written extensively on the design, application and costing of income contingent loans.

Joseph E. Stiglitz is University Professor at Columbia University, USA, the winner of the 2001 Nobel Memorial Prize in Economics, and a lead author of the 1995 IPCC report, which shared the 2007 Nobel Peace Prize. He was chairman of the US Council of Economic Advisors under
President Clinton and chief economist and senior vice president of the World Bank from 1997–2000. Stiglitz received the John Bates Clark Medal, awarded annually to the American economist under 40 who has made the most significant contribution to the subject. He was
a Fulbright Scholar at Cambridge University, UK, held the Drummond Professorship at All Souls College, Oxford, UK, and has also taught at MIT, Yale, Stanford, and Princeton.