Debt collection, but without the defaults and the destitution

Bruce Chapman, who pioneered Australia's income-contingent student loans, is keen to see the system applied in other spheres

April 12, 2012

Credit: Paul Bateman

In Australia in 1988, I was asked by the Cabinet minister for higher education, John Dawkins, to help find an acceptable way to bring about the introduction of university tuition fees. Unbeknown to me at that time, Nicholas Barr of the London School of Economics was completing a book about "income-contingent loans" and how they should be used in the UK to collect university fees.

An income-contingent loan involves students acquiring university tuition debts, which are repaid on the basis of the debtor's future income. If graduates earn low incomes in a future period, no payment is required during that period. The essential benefit of these loans is that they offer insurance for a debtor against the problems associated with having a debt to be repaid when income is low. If an income-contingent loan is designed properly, unlike the servicing of normal loans, there will be no hardships associated with repaying and no default through lack of income.

My options paper to the minister recommended an income-contingent loan for the payment of university fees, to be operated through the income tax system and collected during periods in which the debtors' income exceeded the average income of Australians in the labour force. The scheme, still in operation, was introduced in 1989 and is known as the Higher Education Contribution Scheme.

Barr and I met in 1992, when the Australian government was considering using the Hecs system for expanding student income support. We celebrated our similar approach to the issue, acknowledged that our work was developed in jointly shared ignorance of each other, and plotted and planned the extension of income-contingent loans to the UK and other places. During the 1990s, I was invited to address conferences in the UK to discuss the Hecs, and often Nick was there as well.

Because we agreed on all the essential benefits and administrative arrangements involved with successful income-contingent loans - and all the horrible outcomes that follow from not having income-contingent loans - it became increasingly difficult for each of us to make unique contributions at such gatherings.

The phrase "I would like to support what Bruce/Nick has said..." became the broken record from Nick/Bruce respectively. Eventually, Nick successfully persuaded the UK government to introduce income-contingent loans (in England at least) and this, of course, is the form that tuition collection now takes.

Over the ensuing decades, I became increasingly convinced that income-contingent loans have great potential in other areas of social and economic policy. There is now a considerable body of work on this; here are some examples:

• Why should the Australian government provide billions of dollars in grants to farmers in times of drought when farm families are generally more wealthy than average taxpayers? A possible solution: require the repayment of the income support as a proportion of future farm profits when circumstances improve.

• Is there a fair way of extending government grants for parental leave to allow families with infants the opportunity to finance longer levels of time out of the labour force for child rearing? Possible solution: offer income-contingent loans - of, say, A$10,000 (£6,515) - to be repaid depending on future household income.

• Is it possible to design a system for collecting fines associated with low-level criminal activity, such as theft and assault, in such a way as to minimise the major administrative burdens and costs of collecting them? Possible solution: require offenders to repay their fines depending on future income, with suitably low rates of repayment to avoid hardship.

Many other similar applications have been analysed and modelled out here in the Antipo-des over the past two decades. Researchers have explored the prospect in relation to: extending student income support; research and development projects; nursing home and aged care (using the eventual sale of the family home as part of the repayment arrangement); "white-collar crime" such as insider trading (with fines paid in accordance with the company's profit base); and government legal aid for those not qualifying for assistance. When companies get into financial difficulties, such as happened around the world during the global financial crisis, loans to be repaid depending on future profits could be used instead of bailout grants.

My enthusiasm for research into the potential of income-contingent loans continues unabated and has been reinforced by the Hecs and the UK higher education experience, plus the extension of the loans for higher education into several other countries.

There are some critical issues of administration, however, including the existence of a comprehensive income tax system to allow effective debt collection: in some countries, these ideas have no workable prospect.

Occasionally, irreverent colleagues make tongue-in-cheek suggestions for the adoption of income-contingent loans in previously ignored areas. One memorable idea was to require prisoners to repay the accommodation costs of their incarceration through an income-contingent loan such as the Hecs. The potential for making an enemy of the entire prison population made this low-key academic researcher reconsider the idea of "Hecs for everything".

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