Conventional Fixed-Schedule Versus Income Contingent Repayment Obligations: Is there a Best Loan Scheme?

Abstract: As more countries are planning to inaugurate or enlarge student loan schemes, much of the debate is over the question of the optimal form of the repayment obligation: specifically, whether it should be according to a fixed schedule of payments or a percentage or earnings or income. This paper argues that the current fascination with income contingency is frequently based on a set of supposed advantages, some of which are mistakenly attributed to income contingency either out of misunderstanding on the part of advocates or for political purposes of overcoming resistance to the underlying notion not of loans, per se, but of cost-sharing itself. The paper goes on to advocate a hybrid loan scheme, which can offer the best of both forms of repayment obligation. Student loan schemes have become widespread throughout the world; Shen and Ziderman (2007) reported some 75 in 2007. By the term loan scheme, we mean a program, in most cases involving governmental sponsorship, that covers some portion of instructional or student maintenance costs or both and that results in a repayment obligation, whether this obligation is actually called a loan or by some euphemism (such as a graduate tax) and whether the obligation is to a fixed schedule of payments or is expressed as some percentage of the borrower’s future income or earnings. Some schemes are small: severely rationed by limited loan capital, or sponsored only by a single institution or consortium of institutions (generally private), or focused only on low-risk borrowers such as advanced professional students or borrowers who can produce multiple, credit-worthy co-signatories. A few schemes, including several in Africa, are financially fragile and have little record as yet of repayment recovery. The largest schemes, found in advanced industrialized countries like the United States