Study Now, Pay Later? Please Read the Terms and Conditions.

Posted on behalf of Darragh Flannery (UL) and John Cullinan (NUIG).

The Cassells report was finally published last week with various options for funding higher education outlined. With the dust settled, now may be an appropriate time to take stock of a few important issues. The debate around this topic has largely taken a full state funding approach versus a student loan approach. The student loan scheme suggested as one option within the report is an Income Contingent Loan (ICL) system, whereby graduates borrow for the costs of their education from the State but do not make any repayments towards this debt until they reach a certain income threshold. However, the discussion around this option has been muddied a lot within the debate. There are a variety of student loan systems in operation around the world; some good and some bad. The point of this post is to simply summarise some of the key design parameters within an ICL scheme and highlight the implications of varying these parameters. These have rarely featured in the public debate but can have significant implications for graduates and will thus require deep consideration if an ICL scheme is to be seriously considered.

Firstly, it must be noted that an ICL scheme entails that some students may never pay back any of the debt they owe. For example, if somebody leaves third level education and chooses not to work for the rest of their life, they repay nothing.  In this instance, the taxpayer would ultimately foot the cost of this individual’s education. From an efficiency viewpoint this makes sense as it provides a system where there is burden sharing at its core.  Students that benefit from third level education through higher earnings pay back some of the cost of that education. Society pays through taking on the default risk of those that do not repay fully or anything at all; this particular point seems to have been completely lost in the debate recently. From an equity viewpoint, an ICL scheme provides free access to higher education at the point of entry to every young person in the country.  It has been argued that this is the same with a household mortgage style loan system – the house is free at the point of entry but you pay for it over the next thirty years or so. However, the key difference is that under an ICL system, if an individual makes no repayments due to some spell of unemployment, nothing is repossessed and there is no impact on your future credit worthiness. From both an efficiency and equity viewpoint it can therefore be argued that there is some sense in an ICL system. However, like any change in policy, the devil will be in the detail.

Two separate studies have previously looked at this issue for Ireland, my own ESR paper with Cathal O’Donoghue here and more recent work by Aedín Doris of Maynooth University and Bruce Chapman of Australia National University here. Also, the appendix of the Cassells report presents some sensitivity analysis around certain parameters. While these go into much finer detail around the issue of ICLs, we will simply summarise some of the key parameters and highlight why there are important. These include the debt liability imposed on students, the specific income threshold to be set, the interest rate attached to the loans and the possible capping of repayment burdens.

The first issue that would have to be addressed is the level of debt a student is burdened with for every year they are in higher education. This has to strike a balance between having the ability to provide adequate funding for the third level institutions and not proving extremely burdensome for graduates. This can take the form of a blanket fee for all those attending higher education as outlined in the Cassells report; however, a more efficient way would be to have some variation in this debt across students. This could be linked to the cost of educating the student and/or the potential lifetime earnings from pursing different subject fields. Australia has adopted a system of this type whereby those wishing to study subjects that generally provide a higher return in the labour market such as medicine and dentistry face a slightly higher debt burden compared to those studying in fields such as humanities or nursing.

To be seen as progressive an ICL must have an income repayment threshold that reflects the fact that only those that benefit from third level education should be responsible for some of the cost. The danger of setting the threshold too low is that it places an extra expenditure burden on those graduates that are not earning very much, despite having gone through four years of higher education. Australia has set the threshold at which graduates begin to repay their debt at the average industrial earnings. The Cassells report mentions a lower threshold of the average wage of new graduates; presumably to ensure more graduates pay something towards the cost of their education.

With regard to the interest rate, the level at which this is fixed will help determine both how long it takes for graduates to pay off their debt and the overall state subsidy. An interest rate that is lower than the rate of inflation may significantly increase the subsidy the state provides on the loans by allowing graduates to ‘inflate’ away their debt. If the interest rate is set too high, the debt burden may increase rapidly and lead to longer repayment periods for graduates. A sensible approach would be to either index the interest rate on the loans to the consumer price index or the state cost of borrowing.

Capping the repayment burdens of graduates on an annual basis has seldom arisen in discussion but would form an important part of illustrating the difference between an ICL scheme and personal loans from the banking sector. Such a mechanism would limit the repayment amounts any one graduate may face in a particular year, no matter what their income level is. For example, if a graduate earns well in excess of the repayment threshold of the system, the repayments they make in that year are capped at a certain proportion of their income. Bruce Chapman of Australia National University, the architect of the much referenced Australian ICL system, suggests that this helps to avoid unduly harsh repayment burdens in any given period and could be fixed at around 8-10% of a graduate’s income.

Arguments have been put forward that increased funding for higher education should be provided through increased general taxes, as is seen in some European countries. The Cassells report acknowledges this by outlying two alternative funding options whereby state funding to higher education would be increased significantly and either the student contribution fee would be removed or maintained it at current levels.  However, given the suggestion that an additional €600 million euro per annum is needed in the higher education sector to meet the current demographic and quality challenges, it is highly unlikely either of these options is feasible or desired politically.

There are other important issues within an ICL system that deserve more attention than I have scope for here. These include the potential impact of emigration on repayments and whether the higher education grant system is restructured concurrently. However, for the majority of graduates that may be impacted by such a reform the specifics of debt amounts, income thresholds, interest rates and the capping of repayment burdens are of huge importance and require careful consideration by policymakers. They also deserve more consideration in the public debate around higher education financing.

14 replies on “Study Now, Pay Later? Please Read the Terms and Conditions.”

The ICL structure has lots of detractors, some of whom are interest groups, and some of whom I think haven’t had the ICL system explained carefully to them.

Perhaps one other reason is that, as set out by Cassells, the ICL option, which is option 3, only involves increasing state funding because of demographic growth. Cassels says Option 3 would mean “the proportion of overall funding for higher education provided by the state would be lower than it is currently; and significantly lower than under funding options 1 and 2”. It would mean increased total funding (because of demographic growth) but a lower proportion of the total.

Is there a distributional equity issue here, or are these issues really parameterisation questions? I’m thinking in particular of Tables A.3.3 to A.3.10.

(Obviously this is my own opinion and not that of the HEA)

The discount rate would be the big kahuna for me. You cannot use Ponzi bond yields which have already crucified pension schemes. Very hard to value future cash values with a negative time value of money.

Income growth assumptions would be the next thing . Young people and deflation is a brutal combination when economics is a zero sum game.

I even wonder if third level is worth it under the current system where less and less money flows to the 99%. A lot of grads will not be getting payrises for the foreseeable.

Right! It is considered an intellectual defecit to propose an alternative programme/s (to either amend or replace an existing one) and/or critique those alternatives prior to one publically admitting that the current programme is either, in part or in whole, unfit for its purpose – and to detail the specific parameters of the existing programme which are considered to be problematic. Well?

There might indeed be realistic and feasible fixes available for undergraduate funding and we know from experience that they will work – but. We may have little (or perhaps a biased) knowledge and understanding of a non-existing programme And we know (or at least we assert we do) know the known problems with existing programmes (ie. those being proposed as the alternative). Yeah, sure we do.

But how about those nasty unknown unknowns – its personal debt that we are wishing to impose. Is that such a smart plan, given what we have experienced about the serious financial outcomes and unfortunate social consequences of debt? Well?

Personal comment: Undergrads are currently funded; how? Lets have a full explanation of this. Are their class/lecture attendances monitored? Afterall, if I am paying some taxes to fund undergrad programmes it would be nice to know that the subsidized individuals are actually turning up for class – 09.00 classes (in some faculties) can be as sparsely attended as Motzart’s funeral. A contributor to this blog pithily observed (as they witnessed an overflowing lecture hall) – “Mid-term assessments are always the best attended lectures”. And I might have some interesting commentaries on the quality (as opposed to the quantity) of the manner of the delivery of some third-level teaching programmes.

I would suggest that the administrations of all our third-level colleges and universities (Do we really need them all? And all those programmes?) sort out their own self-generated internal admin and academic problems before we (the poorly informed taxpayer) are induced to fork out any additional subs for Irish higher education.

And yes, the person who is going to ‘benefit’ will have to pay? Its the how of it? Sure is.

Again, the main change in education is technology. Instead of concentrating on how to let people spend lots of money on education (whether borrowed, inherited, taxpayer funded) how about thinking how to turn a UCD/TCD/whatever degree into something that can be done online at dramatically lower cost?

Most of the academic courses could easily be taught online, learned online and examined online. Final diploma exams could be invigilated in a way like – say – the GMAT or GRE do it.


I have many comments to make on this however I will limit myself to one for now. While there is some discussion of the income distribution implications, I think attention to the age distribution also warrants more consideration. The cost of education will be loaded onto the recipient who on average will be the younger generation(s). This in turn reduces the general taxation costs on the remainder of the population. Essentially then it is an inter-generational transfer of wealth, which is hidden behind the more reasonable appearing ‘user-pays’ principle. Given that the younger generations have already been targeted for things like reduced social welfare (and entry wage) rates, higher rental costs etc. I think the age equity considerations of this deserve more attention.

I accept that there are also issues associated with richer-high educated being subsidised by poorer-low educated workers, but adjusting the burden by the age & tax-take distributions of these groups may reveal a more nuanced pattern than is typically envisioned.

IOK, you make a good point. The costs embedded in providing a student with a degree are largely reflective of a model appropriate for the 1960’s.

For example, in the 1980’s, photocopying became readily available and cheap. 100 or more students turning up in person to achieve little more than frantically scribble down usually identical notes for an hour at a time became – in theory at least – unnecessary. However the inertia in academic circles has always been substantial, and the response was often about as slow and reluctant as possible.

There are vast technological opportunities to cut the costs of education.

What would happen to much third level education if a way was found to whittle away the key difference in ‘marketable value’ terms (the certificate) between self-teaching via the internet, and attending a certificate awarding course?

Third level education should focus on rooting out group think. Killing in the name of would be studied in depth. Grads should understand herding and the difference between value and fashion.

Grumpy, Third Level should be about having time to think. Whiskey rather than Vodka in RoE terms. Mark Twain observed that if you don’t read the newspaper you are uninformed but if you do you are misinformed. Graduates should understand that. The issue is larger than is there enough money to educate kids. The issue is do we want to educate kids.

Seafoid, I would agree with you if we were talking about third level education for the top 3 – 5% academically, but we aren’t.

Perhaps a project to identify a small number of potential “thinkers”, and fund their opportunity to hone that talent is something you would be interested in.

Once upon a time that approximated something like the university system, for example in the UK. Then it was decided by government that ‘university’ was for almost everyone who wanted a degree. Then, because of the number, the cost to the taxpayer became an issue.

Talented thinkers from poorer backgrounds used to be able to go to a top UK university essentially for free. Now its £9k to the university, plus accommodation etc per year.

Let’s just say what this is really about:
middle class kids are getting a university education for (almost) free. And their parents don’t want to give that up.

It’s crazy. I make a six figure income yet I pay only €3k per year for my kid to go to Trinity.

Why shouldn’t a graduate have a debt of say €30k? It focuses the mind.

All the talk of helping disadvantaged kids is crap, just an excuse to get the tax payers to fund college for people who can afford it.

@ Stephen, my reading of the report is that the increased funding evisaged is not just due to demographic growth, but also to increased per-head spending to bring staff-student ratios up to international norms – see Section 5.1.

@ seafoid, in the work I did for the Expert Group, I actually assumed zero earnings growth, so those repayment figures are the worst case scenario. Since I did that work, Bruce Chapman and I published a working paper on the topic, and in that we assumed a fairly conservative (by historical standards) income growth rate of 1% real per annum across the graduate age-earnings distribution. FWIW, there is actually some tentative evidence that graduate starting salaries have risen in the last year or two – see the HEA’s most recent What Do Graduates Do report (tentative as the coverage rates for the income questions on these surveys are low, which raises questions about their representativeness.) All the evidence is that there are still substantial private returns to degree holding in Ireland.

The working paper I mentioned can be found here:

@ Tony: I agree that inter-generational redistribution is the biggest issue in the Irish case. But in thinking about this, the counterfactual is also relevant: if an ICL is not introduced, what is likely to happen? The Cassells report argues that a substantial funding is needed for the sector. If the alternative to an ICL were that this funding would be provided from general taxation, then you could validly compare the equity implications of the same total funding being sourced in two different ways. But I think it’s far more likely that the alternative is a massively underfunded HE system. This also implies a redistribution away from younger generations – they either get hit by getting higher education of much lower quality than their predecessors or by having to pay more of the cost of their higher education than their predecessors did. Society should not be indifferent to this choice – higher quality HE is preferable because the social returns to HE investment will drop along with quality.

Thanks all for the comments. Some replies below.

IOK, Grumpy,

The jury is still out on the online versus class room issue in terms of learning and potential cost saving. The Cassell’s report is upfront on this and notes on page 11 that “Information technology has a critical role to play in the future of higher education but it is not a quick fix to the funding problem”. I also tend to agree with their suggestion that “information technologies are not a replacement for direct engagement with students and are not cheap”.

I am not sure what you mean about the distributional equity issues thrown up by tables A.3-A10.?
Do you mean the varying repayments by different percentiles?

Brian Lucey,
Thanks for the article. You mention that in the case of the private good element private payment is already taken through higher tax revenues form graduates. However, the difficultly here as far as I see it is how much of that extra tax revenue should actually be attributed to education? For instance, if I pay €100,000 in extra tax as a graduate, should the amount attributable to my education be €20,000 with other €80,000 going towards roads, the health service etc.? Or 50/50? One other issue with the general taxation model is that having higher education substantially financed through the tax system leads to competition with other areas of public spending. This leaves higher education funding very open to political pressures, particularly in times of economic downturns when student numbers may rise. I am not for a minute suggesting a loan scheme solves every problem from a theoretical or practical viewpoint but the latter point is particularly important in an Irish context I think.

Darragh, I have to say that the Cassel Report’s attitude to technology is laughable.

4 mentions of information technology in a 98 page document. All of them essentially dismissive. And meantime a main didactic technology in use in Irish universities (and other universities) is people standing in a room scraping one type of rock off another type of rock (chalk, slate). It is ludicrous on it’s face.

Information technologies are often exactly “a replacement for direct engagement with students”. And they can be very cheap. There may be a need in many courses (medicine, engineering, science) for actual on-site and hands-on work. But much modern under-grad education is, to all practical purposes, either entirely or almost entirely deliverable through online means. Particularly if the student is interested in actually learning the subject and not just in having a long taxpayer subsidized vacation. (and we could talk for a long time about the social value of university years, network development, etc, but it’s a separate conversation)

It’s gobsmacking to me to read a report like that with 4 dismissals of IT as a transformative change while having three recommendations…each of which is a variant on the theme “More money please”.

I wonder if, to put a wild thought out there, you sold Belfield and moved UCD online, how much IT you could fund?

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