Income Contingent Loans: Concepts and international experience

Transcription

1 Income Contingent Loans: Concepts and international experience Bruce Chapman Crawford School of Public Policy Australian National University

2 OUTLINE Theory Part 1: The Need for Government Intervention in Higher Education Financing Theory Part 2: Bank loans versus ICL

3 Theory Part 1: The Need for Government Intervention in Higher Education Financing human capital investment is uncertain: completion; ability; and the future labour market.. poor outcomes can lead to default the problem for banks: no saleable collateral the problem for students: no access to loans government intervention is required two types of loans: bank (gov t guaranteed, US, Canada) and ICL

4 Theory Part 2: Bank loan problems: repayment difficulties and default costs

5 Theory Part 3: Repayment burdens, the big issue for student loans

6 HECS Income Thresholds and Repayment Rates: 2010 (debt = $20,000) HECS repayment incomes in the range: (A$) per year Below $50,000 Per cent of income applied to repayment Nil $50, $80,000 and above 8

7 Dollars Figure 1 Typical male repayments: Full time graduates $60, $55, $50, $45, $40, $35, $30, $25, Gross Income After HECS $20, Age

8 Dollars Figure 2 Typical female repayments: Full time graduates $60, $55, $50, $45, $40, $35, t $30, $25, Gross Income After HECS $20, Age

9 Percentage Figure 3 Comparing Bank and HECS Repayments for Graduates Working Full-time 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% HECS BANK AGE

10 Dollars Figure 4 Illustrating consumption smoothing for a very unlucky woman ($2004) $60, $50, $40, $30, $20, $10, $ Age Annual Income Disposable Income after HECS

11 Income, Loan Payments Figure 5 Bank and HECS Absolute Repayments for an Unlucky Graduate $3, $3, $2, $2, $1, $1, $ $ Age Bank Payment HECS Payment Male HECS Payment Female

12 Percentage Figure 6 The Big Story: Debt Repayments as a proportion of taxable income for an unlucky graduate: females Full Time Unemployed Part Time Full Time 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% HECS AGE BANK

13 Illustrating the RB problem for other countries: Method

14 US: INFLATION ADJUSTED REPAYMENT STREAMS Real $ per year 20,000 18,000 16,000 14,000 Debt=$20,000 (10-year repayment) Debt=$100,000 (10-year repayment) Debt=$100,000 (25-year repayment) 12,000 10,000 8,000 6,000 4,000 2, Year

15 REPAYMENT BURDENS OF LOW INCOME LAWYERS WITH MAXIMUM DEBT Borrowers Repayment Male Female plan Maximum a Average b Maximum a Average b Private sector lawyers Standard 0.49** 0.25** 0.38** 0.23** Public sector lawyers Standard 0.76** 0.38** 0.93** 0.47** Private sector lawyers Extended 0.29** ** 0.14 Public sector lawyers Extended 0.46** 0.23** 0.56** 0.28** We only report average repayment burdens for the first 10 years of the extended repayment plan. * Repayment burden exceeds 15 percent. ** Repayment burden exceeds 18 percent.

16 RBs for many countries: Vietnam, Indonesia, Germany, Thailand

17 HECS and ACCESS Figure 11 Proportion of 19 year olds enrolled by family wealth % Lowest quartile Middle quartiles Top quartile 60% 50% 40% 30% 20% 10% 0% Source: Chapman and Ryan (2002).

18 Bureaucratic Politics and the Academic We love the ATO Meeting the ATO, Mark I (Meredith Edwards had set the scene) Meeting the ATO, Mark II

19 Theory Part 1: The Case for a Charge. higher education as an investment process private costs: foregone earnings + tuition private benefits: additional lifetime earnings graphical summary: Figures 1-4 net benefits imply the case for a charge (budgets are not free)

20 Annual Income Figure 1 Typical Australian Female Age-Earnings Profiles: 2004 $60, $50, $40, $30, $20, $10, $- Year 12 Bachelors Age

21 Annual Income Figure 2 Typical Australian Male Age-Earnings Profiles: 2004 $70, $60, $50, $40, $30, $20, $10, $- Year 12 Bachelors Age

22 Figure 3 Typical Male Age-Earnings Profiles: Mexico 2001 Ps/Hr Age High School Complete University Complete

23 Figure 4 Typical Female Age-Earnings Profiles: Mexico 2001 Ps/Hr Age High School Complete University Complete

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31 Conclusions IRL are motivated to reduce risk The banking system is unable to achieve this There is a range of possible benefits: defaultprotection, consumption-smoothing, tax equity and administrative efficiencies IRL can reduce taxpayer outlays Government seems to be required: privacy provisions and collection efficiencies There are critical issues of adverse selection, moral hazard and collection complications

32 The International Experience of ICL The Yale Plan, 1972 Sweden, 1988 (deferral if incomes low) Australia, 1989 (first to use the tax system) New Zealand, 1991 South Africa, 1991 Chile, 1994 The US, 1993 The UK, Ethiopia, 2002 Thailand, 2006 Israel, 2008 Up-coming visits: Mexico and Colombia, 2007 Crawford/DPU East Asian Conference (Japan, Thailand, Malaysia, Indonesia), 2008

33 Conclusions A charge is justified on distribution grounds Government intervention is necessary Bank loans and ICL have both costs and benefits ICL provides insurance against default ICL provides insurance against consumption smoothing Policy processes are critical to outcomes No adverse effects of HECS on access (and the system is 70 per cent bigger) ICL using the tax system reflect a quiet revolution in higher education financing

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35 Thank you