Recent Research on Income-Contingent Student Loans

(This is a joint post with Darragh Flannery of UL and Kevin Denny of UCD).

Income-contingent loans (ICLs) for students were one of the options proposed by the Cassells Report on Future Higher Education Funding when it was published last year (see here). The topic has been back in the news again in recent weeks because of the dissemination of a paper[1] by Shaen Corbet and Charles Larkin, which claims to show that an ICL could not work in Ireland.

Two of us (Doris and Flannery) have done research directly in the area of ICLs – indeed Doris’s research ended up being used by the Cassells Expert Group to provide illustrations of how an ICL might work in Ireland. We both found, using different data sets and different ICL parameters (income thresholds, repayment rates etc.) that the discounted value of loan repayments would be about 75% of the loan values, even when accounting for graduate emigration.[2] Under these repayment rates, there would be no problem operating an ICL in Ireland.

The third poster (Denny) has written papers on the determinants of participation in higher education (HE), the returns to education and related topics and so has a strong research interest in the effects of funding on access to HE.

We were all surprised by the reports of Larkin and Corbet’s results and so went off to read the paper. This had added interest as the research appears to be influencing policy makers.  Given this context and with apologies for the length of the post, we have decided to make our assessment of it public.

Continue reading “Recent Research on Income-Contingent Student Loans”

Higher Education Funding Links

There have been lots of contributions since the Cassells Report issued. It’s probably worth putting them all in one place. If I’ve missed some, please pop them in the comments.

The Cassells Report itself.

The reaction to the report

Carl O’Brien has a great series of articles on the subject. Here’s one: College funding explainer: The three options to pay for third level

Michael O’Regan: Senators criticise proposal for student loan scheme

The reaction to the reaction

Brian Lucey: Third level financing fails to paint the whole picture

Niamh Hourigan: Student loans will make graduates flee. Face it, tax is the best way to fund third level

Lorraine Courtney: State continues its war on youth, denying them a brighter future

Kim Bielenberg: Facing a higher degree of debt – students could graduate owing €20,000

Darragh Flannery and John Cullinan Study now, pay later? Please read the terms and conditions

Brian Hayes Why this Dáil may actually grasp the nettle of higher education funding

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.

Geographic inequalities in higher education accessibility

Update: Now open for comments. (Novice error!)

As Leaving Certificate students take their seats this morning to start their final examinations, it is timely to consider how where they live (and often where they were born) can impact on a range of higher education decisions and outcomes and why these might matter for their futures. According to previous research, Ireland has reasonably good overall geographic accessibility to higher education institutions (HEIs) in terms of travel distance, though there are large areas from which an individual would have to travel, say, 75kms or more to their nearest HEI. These areas tend to be more rural with relatively low population densities and with a finite number of HEIs some inequality in access is of course inevitable.

But not all HEIs are the same. If we distinguish by type of HEI, then the pattern of geographic inequality is very different. In particular, if we consider distance to nearest university as another measure of accessibility, then geographic accessibility inequalities are much more pronounced, with relatively poor access in much of the south-east, south-west, west, north-west and along the border.

Such inequalities matter for a number of reasons, particularly in terms of the impact of geographic accessibility on whether school leavers progress to higher education and, if they do so, where and what they choose to study. Indeed, this is the focus of an on-going programme of research I am conducting jointly with Darragh Flannery (UL) and Sharon Walsh (NUI Galway). For example, this paper showed that greater travel distances were associated with lower participation rates for school leavers from lower social classes, all else equal. It also highlighted how these distance effects resulted in differential higher education participation rates across social classes and that the effects of distance were most pronounced for lower-ability students from poorer backgrounds.

Importantly, distance also matters for where and what students study, suggesting possible inefficiencies in matching students to courses. For example, a separate piece of work found that geographic accessibility plays an important role in determining outcomes relating to HEI type, degree level and field of study, with students living further from a university much more likely to study at an institute of technology (IT), all else equal. The paper argues that these decisions are important in terms of future labour market outcomes such as employment rates and earnings for school leavers.

The pursuit of equity in access to higher education is claimed to be central to education policy in Ireland. Although much of the focus has been on narrowing the social class differential in participation, spatial factors are now finally being acknowledged as a potential barrier to access.  In a consultation paper on the development of a National Plan for Equity of Access to Higher Education 2015-2019, the Higher Education Authority highlighted the strong geographic dimension to higher education participation.

At present, one of the main policy responses to address inequities in access is the ‘student grant scheme’, which includes maintenance grants, fee grants and postgraduate contributions. The maintenance grant scheme is a contribution towards a student’s living costs and eligibility is based on meeting certain criteria based on parental income levels and means, as well as travel distance from a student’s chosen HEI.  Thus, the grant system explicitly acknowledges the potential impact that travel distance can have on higher education related decisions.  The current grant eligibility limit for the so-called adjacent (partial) grant is 45kms or less (up from 24kms in 2012), while the non-adjacent (full) grant applies to those living more than 45kms from the approved institution.  Thus, two otherwise comparable students, one living 50kms from her chosen institution, the other living 250kms away, would receive the same financial aid.

The results from our studies suggest that consideration should be given to establishing a more flexible or stepwise higher education grant system, with progressively higher payments for those living further away. As it currently stands with a single distance cut-off of 45kms, the maintenance grant system does not take into account that significantly longer travel times could have important implications for students in terms of financial costs, but also in terms of their available time to engage in paid employment to perhaps support their studies. Of course, any revised system would need to be carefully designed in order to avoid unnecessary transaction costs, as well as imposing perverse incentives for students to travel further than necessary.

Finally, one area of current policy likely to impact on geographic accessibility is the proposed consolidations in the Irish higher education sector, with a number of ITs to be possibly amalgamated into new technological universities. In a paper published last week, we used a variety of techniques and measures to consider the effects of the proposed re-structuring on both the level of, and inequalities in, geographic accessibility to university education.  Overall we found that the north-west and areas of the west, south-west and border are poorly serviced in terms of absolute and relative accessibility to university education both pre- and post-policy reform.  These areas consistently remain in the bottom quintile of each measure of accessibility considered, implying that the impact of the reforms for those regions will be negligible.  On a more positive note, we did find that the percentage of the 17-19 year old cohort (a good proxy for the population of school leavers) who live more than 100kms to their nearest university would fall from 14.5% to 7.9% post-reform.  However, the same analysis showed that there would remain a significant minority living more than 150kms from a university.  Overall we concluded that “the reform will do little to remove geographical impediments to university participation for those that are most disadvantaged [currently] from a spatial standpoint.”  This assertion is also supported by the inequality analysis, which shows little improvement in overall geographic inequality in university accessibility across Ireland as a result of the consolidation reform.

So, as Leaving Certificate students take their seats today, it is worth stressing that the choice set facing many of them in terms of their higher education opportunities is very much a function of where they live. For resource-constrained students in particular, the distance impediment is not adequately addressed through current policies. Unfortunately, changes to the grant system rarely feature in the debate around the financing of higher education. Any move to an alternative financing system would provide an ideal opportunity to address this issue.