Commentary | From each according to their ability, to each according to their need

The case for income-contingent student loans

The Quebec government, in its 2011 budget, announced plans to increase rates by $1,625 over five years, bringing the cost of university education back to 1968 levels, adjusted for inflation. This increase is consistent with two beliefs: that those who benefit most from a service (students in this case) should bear a bigger share of its cost if they can afford to do so, and that public universities must command enough resources to meet the twin challenges of global competitiveness and accessibility for students from low-income families.

Contrary to what some on the left would have us believe, these two aims are neither contradictory nor mutually exclusive. Rather, competitiveness and accessibility can be mutually reinforcing, since increased funds will allow public institutions  to both maintain high-quality standards and to make financial aid, in the form of grants, bursaries, and student loans, more widely available.

With this in mind, the Quebec government needs to couple fee increases with an overhaul of its student loan policy. The government should replace existing schemes, which place an unnecessary burden on students and ignore their future earning potential, with low-risk, fairer, and more realistic income-contingent loans that will give universities a stake in their alumni’s success.

First proposed by economist Milton Friedman in 1955, income-contingent loans solve the problem posed by students’ lack of collateral when they begin their studies. Because their ability to repay depends largely on future income, under conventional loan schemes a significant portion of borrowers will inevitably default, unable to pay back the full amount of the loan plus accrued interest. At the same time, comparatively successful students will be liable to pay the same amount as less successful ones, even though the returns on their investment in post-secondary education are substantially higher. The prospect of long-term indebtedness and possible default will discourage some to take out loans in the first place, forcing them to seek alternative sources of finance or to renounce their plans to attend university altogether.

By contrast, income-contingent loans acknowledge students’ uncertainty about future earnings and allow them to sell “shares” in themselves, the return on which will vary according to each individual’s post-university performance. Unlike conventional loans, payments in this scheme are not based on a fixed monthly amount, but on a percentage of income, so that the more successful pay more and the less successful are not faced with impossible commitments. Not only do they lower the risk associated with taking out a loan, but they are also self-financing, since the losses made on students with low future incomes will be compensated for by high earners, who will be paying considerably more than what they borrowed.

But is it fair that the more financially successful students should effectively “subsidize” the not-so-successful? Yes, for two reasons: First of all, future high earners are arguably, in the majority of cases, as uncertain about their future income when they begin their studies as future low earners, so they will be more than willing to insure themselves against default by promising to pay a premium on top of what they owe if their earnings exceed a certain threshold. Second, it seems only fair that the repayment of a loan to finance an investment in education should be tied to the returns on that investment.

How does an income-contingent loan scheme enhance both competitiveness and accessibility? The latter is ensured by making credit available to all those who ask for it, regardless of their present economic situations, and by eliminating the potential for over-indebtedness. The former is inextricably linked to the way these loans work: because repayment depends on future success, universities have a stake in providing borrowers with the skills demanded by the market, since they will determine whether or not they get their money back. Such loans thereby provide an incentive for universities to remain competitive and up to date with employer needs.

Income-contingent loans were successfully implemented in Australia in 1989 and New Zealand in 1992. Both countries simultaneously increased tuition fees and revamped their loan policy to ensure both adequate funding and universal access. In 2005, Quebec announced plans to introduce a similar system, but student union pressures forced the government to abandon the idea. As consensus grows over the real urgency of tuition hikes, the time is ripe to introduce such reforms to make sure no one is left behind.

By tying repayment to future performance, income-contingent loans eliminate the nightmare of default, while asking more from those who benefit the most from a university education and giving institutions strong incentives to furnish students with appropriate skills. They make credit available to all according to their need, and ask them to pay back according to their ability. It seems to me that you could even approach Karl Marx with such a policy.

Diego Zuluaga Laguna is a U2 History and Economics student. He can be reached at diego.zuluagalaguna@mail.mcgill.ca


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