Graduate taxes, not student loans, for Ireland

Governments usually, and often quite correctly, come in for severe stick for lack of joined up thinking. In that regard it is quite pleasant to see the initiative from the Department of Social Protection on moneylenders. Linking repayment to credit union loans to welfare payments allows low risk in lending and thus low interest rates. Would that similar joined up thinking pervaded the issue of student loans.

 Post the Cassells report the landscape on higher education funding has become clearer. With it, and the appointment of a more business and teaching orientated Higher Education Authority, it is clear that the political thrust is to make higher education more of a commodity, at both the input and output side.  Students will pay and employers will hire, the inference being that over time those areas (perhaps medieval history? ) that our market orientated overlords deem frivolous will wither on the finding vine, as institutions cut their gown to the market measure. How this is to be done is unclear. Its Brexitificated – the problems are simultaneously asserted not to exist and solutions unspecified are asserted to exist to these same non existent problems. 

 The Cassells report is very stark on the need, regardless of any other considerations, for increased state spend on higher education. The mood music from the state is that the income contingent loans approach, whereby fees will be paid in large part by a loan whose repayment is linked in some way to income levels, will be chosen. It is also very clear that with the looming threat of a general election, omnipresent with a government that is fractal in its minority, this will stymie any radical movement on higher education until after said election crystallises. At this stage FG are intergalactic experts on can kicking.

 Regardless, we need to ask some hard questions. Again to be fair to the report it acknowledges that much practical work needs to be done on any income contingent loan scheme.  A pandemonium of devils caper in the details of any income contingent loan. Lets summon some of them.

 So, who will administer and indeed originate the loans? Will it be the existing credit institutions , the educational institutions (how many saff needed for that ?) or a new government quango? Credit outstanding to the household sector stood at €86b  in March 2016, the latest date for which we have credit.  Some €11b of this was personal loans.  Irish households, as documented by the central bank, are still under pressure from the credit boom.  Debt to income ratios are still north of 150%. This is very high by international standards,  the third highest in the EU.  Worryingly, with a return to some economic stability, low interest rates and a recovering banking sector recent months have seen a return to net consumer credit growth, concentrated in short-term loans.  Over 8% of term loans are impaired, and credit conditions are loosening. In short, the household sector is stressed

This is not a good place to be if we are to seek to have households take up loans of €20-€25,000. When we consider that the option to pay fees upfront will remain, the reality is that the loans will be loaded towards those ex ante least endowed with financial assets, and thus weaker in borrowing terms.

Will the banks lend to them? Would you as a banker lend to a client with the following characteristics; they may not complete the purchase of the asset (drop out of college) whose very purchase will enable them to repay, they may not be in the jurisdiction to allow you to enforce payment (emigration) ; there is no certainty that they will be in a position to repay (income levels may not be at high enough levels); there is uncertainty over security (is the loan the legal responsibility of the parent or the student, who may be a legal child); there is worldwide evidence of potentially high delinquency in this loan type (40% in the USA; 13-28% in Canada; an implicit default rate of 45% in the UK; somewhat less than 20% in Australia).  Irish banks are already under the cosh for high degrees of nonperforming loans, resulting in their being bottom of the pack in the latest EBA stress tests. Do we really want to add more NPL’s to their balance sheets? 

 Other banking type questions abound : what about credit scoring for example. If the parents do not have good credit scores, will the student be denied the opportunity to take out a loan, or will this be at a higher level. Again, what if they are a legal minor?  What if people fall behind on these loan repayments, how will that impact on them? Will these loans be counted as part of the package when seeking credit for other issues such as housing etc?  What provisions will be made for lifetime events, such as maternity leave or redundancy etc? Will loans to female students or those in more “dicey” subjects (ie not Law/Commerce/Medicine) be at higher rates to reflect this higher credit risk? 

Ireland has a history of emigration. Six months out 8-10% of graduates are working overseas, consistently, as evidenced by the HEA First Destinations Survey. Many more spend time overseas at times in their career. How do the banks capture these, given that the loans are income contingent and the income being reported in Ireland is zero. Do we start, as New Zealand is, arresting graduates as they return, if behind on payments? That will be good TV on the 23rd December…

“and now we talk to Maura, whos here with Garda Noel Furlong and Garda Siobhan Creedon, as she heads to spend Christmas in Santry Garda Station to answer questions on why she hasn’t paid her bill for her degree in Nursing… Maura…MAURA”…

cuts to the private terminal where billionaire tax not-exiles-just-y’know-not-heres saunter in to tell us how to pay taxes, pixieheads. Not a good message. But if it is a loan, there is a contract, and it has to be enforceable. Else we end up in an Irish Water situation, again, except bigger and messier. Maybe we could link repayment to the renewal of passports, as has been suggested also in Australia and New Zealand, but that is very time consuming.  

What if the model becomes self defeating – there is some emergent evidence that, in the UK, the graduate earnings premium is all but eroded by loan repayments. In that case we will find that the percentage of those that dont end up paying, if we go income contingent, falls away and the system dies. 

An income contingent loans system has a hoard of devilish details any or all of which can derail it. It works best when the state enforces the collection of repayment. But that is functionally identical to a graduate tax, a slightly higher marginal tax rate on graduates until the cost of the degree plus interest is repaid. Think of a USC type levy, where 1% of the income is levied as a repayment.  That is simpler. It still doesnt sort the emigration issue, but dual tax arrangements might help there.  There is some economic evidence that, in the situation where we cannot get the ideal solution and must make do with “second best”, a graduate tax is perhaps the best worst approach. Graduate taxes can in principle be linked to teaching and learning outcomes, but do create some tax based incentive issues. Graduate taxes may be preferable in situations where society is risk averse. From a theoretical basis there is some evidence that graduate taxes are welfare enhancing. 

There is no evidence, which is not to say it does not exist, that serious engagement with the financial services industry, the Central Bank or the higher education sector has taken place on the administration of this. There is no evidence whatsoever that Irish bank would be in the slightest bit interested in getting into the market. Bargepoles come to mind. Richard Bruton could do worse than have a coffee with Leo Varadkar and learn about joined up, small step thinking.

A longer version of a column in the Irish Examiner, Monday August 1 2016