Deferred and Income-contingent Tuition Fees: An Empirical Assessment using Belgian, German and UK Data

This paper is a numerical exploration of the following. Assume, in the European Union context, that decision-makers want to spend more on higher education via higher tuition fees, but also want payments to be deferred and income-contingent. There are several possible ways to achieve this. First, ask graduates to repay a fixed amount each year if their current net income is above a certain threshold—income-contingent loans (ICL). Second, ask former students to repay a fixed proportion of their income—human capital contracts (HCC). What are the respective distributional properties of these policies, and how do they compare with traditional financing through income taxation? This paper shows that, irrespective of major variations between countries with different higher education, labour market and fiscal structures, with income taxation non-graduates pay more that 50% of the increased higher-education costs. It also shows that the HCC and ICL have vertical equity properties because non-graduates do not pay, but also because the income contingency principle on which they are based redistributes income among heterogeneous graduates. Finally, the paper shows that HCC are the best way to take account of graduates' ability to pay. It also reveals, however, that the ICL can be made to be almost as equitable.