An Income-Contingent Financing Program for Ontario

Although the positive externalities associated with higher education favour substantial government support, sound arguments also favour student contributions to the costs of post-secondary education, based on both the private benefits obtained and the regressive impact of general subsidies for higher education. At the same time, the central role that higher education performs as a vehicle for social mobility and the general reluctance of private lenders to finance individual investments in higher education suggest that governments also have an important role to play in the area of student assistance - ensuring that higher education is accessible to all students on the basis of merit, irrespective of financial ability. The need for a well-designed student assistance program is more important than ever. Among many proposals for a restructured student aid system, one of the most promising is to replace existing 'mortgage-style' student loads with a financing arrangement involving repayment obligations that depend on the student's income after graduation. To the extent that this 'income-contingent' approach reduces the risk to borrowers with respect to their investments in higher education, it will likely lessen the reluctance that students exhibit with respect to such borrowing. Moreover, where funding covers both the direct costs of higher education as well as living expenses, income-contingent financing programs may enhance accessibility by making higher education effectively free at the point of purchase - offsetting the 'sticker shock' associated with increased tuition fees as well as living costs which generally exceed the direct costs of higher education. Finally, collection through the income tax should reduce the incidence of nonpayment and dramatically lessen the costs of administering student financial aid. This paper proposes an income-contingent financing program (ICFP) for Ontario to replace the current system of mortgage-style loans, automatic debt remission, and interest and debt relief available under the Ontario Student Assistance Program. Part 1 reviews the current system of government-provided student aid in Ontario, providing an essential foundation for our subsequent proposal for an ICFP. Part 2 examines the experience with ICFPs in Australia, New Zealand, Sweden, and the UK, in order to derive lessons relevant to the design of an ICFP for Ontario. Part 3 considers the essential features of an ICFP, canvassing the competing arguments and making specific recommendations informed by our review of the current system in Ontario and the international experience with ICFPs.