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Income Contingent Loans: Background

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Income Contingent Loans

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Abstract

Income contingent loans (ICL) are generally collected through the income taxation system and are repaid only when future incomes exceed a specified level. ICL were first introduced in Australia in 1989 to help college students finance their tuition costs; since then many countries have followed this policy approach. This background chapter analyses the conceptual and empirical basis of ICL, and explains that compared to ‘normal’ bank loans — which are paid on the basis of time — ICL provide the insurance benefits of consumption smoothing and default protection, and are associated with significant collection transactional efficiencies. We examine the prospect of the application of the basic principles of ICL into many other potential areas of social and economic policy, and highlight the significant ICL design difficulties related to both moral hazard and adverse selection.

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© 2014 International Economics Association

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Chapman, B. (2014). Income Contingent Loans: Background. In: Chapman, B., Higgins, T., Stiglitz, J.E. (eds) Income Contingent Loans. International Economic Association Series. Palgrave Macmillan, London. https://doi.org/10.1057/9781137413208_2

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