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Financing Higher Education with Students Loans - The crucial role of income-contingency and risk pooling

Listed author(s):

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

  • Olivier, DEBANDE

    (European Investment Bank, Luxembourg)

There are many economic and philosophical arguments supporting the introduction of student loans as a way to complement public financing and secure adequate resources for higher education, particularly in Europe. These arguments are briefly reviewed in this paper. But the case in favour of student loans largely rests on the capability to provide loans that are income-contingent. Indeed, income-contingent repayments are critical to both efficiendy (students and lenders should not be deterred due to excessive risk) and equity (contributions should be tailored to ex post ability to pay). But income-contingency comes at a cost that can be expressed as a risk premium that should be supported and shared between graduates and/or taxpayers. The central aim of this paper is to produce realistic estiamtes of such a risk, identifying the conditions for the implementation of an income-contingent loan scheme in order to channel additional private funding to higher education systems. How does low lifetime income and/or unemployment spells among higher education graduates translates into risk premia ? Results, derived from the analysis of Belgian earnings data, suggest that the risk premium ranges from 13% for university (ISCED 6-7) graduates to 26% for non-university (ISCED 5) ones. The paper further investigates the various ways of pooling and shifting this risk, while addressing the danger of public debt classification (ie, student loans classified as public) and adverse selection (ie, unsustainable pooling of high and low risk loans).

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Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2004036.

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Date of creation: 01 Dec 2004
Handle: RePEc:ctl:louvir:2004036
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  1. Michael Kremer, 1993. "The O-Ring Theory of Economic Development," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 551-575.
  2. Salvatore Barbaro, 2002. "The Distributional Impact of Subsidies to Higher Education - Empirical Evidence from Germany," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 59(4), pages 458-458, December.
  3. Bas Jacobs, 2002. "An investigation of education finance reform; graduate taxes and income contingent loans in the Netherlands," CPB Discussion Paper 9, CPB Netherlands Bureau for Economic Policy Analysis.
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