No 41 (2005): Deferred and Income-Contigent Higher Education Fees

There are many arguments for shifting at least part of the higher educational cost burden from governments (or taxpayers) to individuals, particularly in Europe. But this case largely rests on the capability to offer deferred and incomecontingent payments. The two first features are critical to efficiency – students and lenders should not be deterred by excessive risk – and justice – contributions should be tailored to ex post ability to pay. Examples of instruments satisfying these criteria are income-contingent loans and human capital contracts. The central aim of this paper is to produce realistic estimates of how graduates’ and nongraduates’ lifetime income is likely to be affected by the generalisation of these instruments. Using data on Belgian income, we evaluate their effect on the distribution of lifetime net income, using higher income tax as a benchmark. The paper then considers the different ways of financing the cost of income-contingency, with a particular focus on the risk of adverse selection inherent to pooling the cost among graduates. But it shows that investing less on students opting for less profitable programs is a simple way to mitigate its severity.