Comment & Analysis
May 20, 2017

An Income-Contingent Loan Scheme is the Only Option for Ireland and its Students

Dr Aedín Doris and Prof Bruce Chapman argue that a loan scheme would have no negative impact on students from lower socio-economic backgrounds.

Aedín Doris and Bruce Chapman
Sinéad Baker for The University Times

In March of last year, the government’s higher education funding working group report, commonly known as the Cassells report, concluded that a sharp increase in Irish higher education funding is needed. This is because of a combination of future demographic growth and the need to reduce student-staff ratios to international norms. The report’s assessment is that €600 million in additional core funding will be needed annually by 2021, increasing to €1 billion annually by 2030.

These are very substantial numbers, which are forcing policy makers to think hard about who should be expected to pay for it.

The Cassells report outlines three options to achieve this rise in higher education funding. One entails the return to so-called “free fees” – eliminating the existing €3,000 charge and funding both the loss of this income and the required additional funding from exchequer resources.


A second option entails retaining the €3,000 charge and providing the additional funding from the exchequer.

The third option is an increase in fees to either €4,000 or €5,000 per annum for all students, including those currently covered by grants. At the same time, a system of income-contingent loans would be introduced.

The introduction of the income-contingent loan in 1989 has had no effect on the socio-economic mix of students, with there being about a doubling of the number of students from poor backgrounds in the system

Income-contingent loans are loans that are repaid at different rates by different individuals, according to their earnings. No repayments are made until a graduate’s income hits some threshold – in our research, we set this threshold at €26,000, but it could also be set higher or lower. In years when earnings are below this threshold, no repayments are made. As earnings rise or fall, repayments move with them. Repayments are deducted automatically from pay along with taxes.

Income-contingent loans are, therefore, completely unlike other forms of debt. Even the concept of “default” is absent – if you fail to repay your debt, there is no effect on your credit rating. As well as having repayments that are affordable – because they are specified as a low percentage of earnings – these loans also ensure that there would be no charges for higher education attendance at the point of entry.

Since the current student charge of €3,000 is causing difficulties for many families, this would be a significant improvement over the current system.

It is important to recognise that income-contingent loans are hardly a new idea in practice. They began in Australia in 1989, and were adopted in New Zealand in 1991, England in 1997, Hungary in 2001, South Korea in 2011 and the Netherlands in 2016, and seem set to be introduced in both Colombia and Thailand. There has been a quiet international reform experience towards income-contingent loans going on for quite a while.

Many countries introduced income-contingent loans to allow a fair and protected way for students to start paying fees, and this was the case in Australia, England and New Zealand. Other countries, such as Colombia, Thailand and South Korea, wanted to change their student loans systems away from “mortgage-type” loans, where a fixed monthly repayment is made for a fixed number of months, regardless of the graduate’s income. Such loan systems are dominated by default and repayment hardship and income-contingent loans offer a solution to these problems.

Those who oppose income-contingent loans often do so on the basis that students from poorer families will be put off attending higher education by the prospect of debt. There has by now been considerable research on this, particularly with respect to Australia. What has been found there is that the introduction of the income-contingent loan in 1989 has had no effect on the socio-economic mix of students, with there being about a doubling of the number of students from poor backgrounds in the system, and about the same expansion for students from richer backgrounds. This has been similarly the case in England and New Zealand.

The evidence therefore suggests that students, whatever their background, realise that the benefits of higher education substantially outweigh the costs – and this is nowhere more true than in Ireland, with the average increase in earnings from holding a degree higher here than anywhere else in the OECD.

It is a frustrating aspect of the debate on income-contingent loans in Ireland that the US experience of student loans is invariably raised in discussing the issue. One of the big problems with student debt in the US is that the loans are not income-contingent – they are “mortgage-type” loans. This has been associated with default rates of around 30 per cent, with all the accompanying consequences for graduates’ credit ratings. It is exactly this problem that income-contingent loans are designed to avoid.

Of course, another problem with the US system is the size of the tuition fees, particularly in the burgeoning private sector colleges. This is not an issue in the Irish system.

But those who have gone to college benefit far more, so it is fair that they should contribute more. Paying some fees – but deferred through an income-contingent loan – allows this

A further frustrating point is that the proponents of “free fees”’ rarely acknowledge how regressive they are – free fees constitute a substantial transfer from taxpayers who have not benefitted from higher education to those who have. Since those who attend higher education come disproportionately from middle class backgrounds (99 per cent of children in Dublin Six attend third level, compared to 15 per cent of those in Dublin 17), it is also a substantial transfer from the working classes to the middle classes.

Of course, to some extent, everyone in Ireland benefits from having a highly educated population, even those who haven’t gone to college themselves. But those who have gone to college benefit far more, so it is fair that they should contribute more. Paying some fees – but deferred through an income-contingent loan – allows this.

Contrary to some scare stories being promulgated in recent weeks, income-contingent loans are the most cost-effective way for the government to increase higher education funding. Our research shows that, with a fairly typical income-contingent loan scheme, about 75 per cent of loans would be repaid. This means that the effect on the annual budget deficit – the gap between government revenue and expenditure – would be about €600 million per annum lower with an income-contingent loan scheme than with the “free fees” option.

An Irish income-contingent loan would allow a substantial increase in higher education funding at a lower cost to the exchequer than other alternatives. The savings can then be used to improve funding for earlier education, from pre-school through to secondary school, which is where the main barriers to participation in higher education lie.

Aedín Doris is a lecturer in Maynooth University’s Department of Economics, Finance and Accounting. Bruce Chapman is a Professor of Economics in Australian National University and helped design Australia’s student loan scheme in 1988.

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