Financing Higher Education: Answers from the UK

By Nicholas Barr; Iain Crawford | Go to book overview

Chapter 4

1989 A specific loan proposal

Nicholas Barr (1989), 'National Insurance Based Loans', in Student Loans: The Next Steps, Aberdeen University Press, Ch. 5, pp. 52-66.


1

The basic idea

Different types of income-contingent loan schemes

Student loans must have income-related repayments […]. Thus it is vital to choose Option D (UK, 1988, para 3.15). Loans of this type can vary along two dimensions. They can be organised via income tax or via National Insurance Contributions (NICs). There is a strong presumption that administrative costs are minimised when a small scheme (i.e. student loans) is 'piggy-backed' onto a larger one like income tax or the National Insurance system.

The second dimension is whether the scheme is organised as a loan or as a graduate tax. Under a loan scheme the student repays what he/she has borrowed until the loan (plus interest) has been paid off, at which point repayment ceases. With a graduate tax repayments are for life, or until some predetermined date such as the age of retirement. Graduate taxes thus redistribute from rich graduates to poor; pure loan schemes do not. Each approach is internally consistent; either is possible, and either can be supported; but it is important not to muddle the two.

Though these ingredients can be put together into different packages, the scheme suggested here is very specific: it is a genuine loan scheme with repayments organised via NICs.

-43-

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