What is an ‘income contingent loan’? It is one in which repayment depends on the future income of the recipient of the loan. A recipient – individual or business – is provided with finance, from either the private or public sectors, for agreed activities. The key characteristic of this loan is that when those assisted experience adverse economic circumstances they have no repayment obligations in that period, so that the collection of the debt is based on capacity to pay. It is this feature of income contingent loans which delivers the benefits to borrowers of both default insurance and consumption smoothing.
At a symposium entitled Government as Risk Manager, the role of, and potential for, income contingent (or income related) loans to address a range of social and economic problems were explored. The author and others were invited to comment at that symposium on the implications for public policy of the use of such loans.
This paper summarises the arguments raised at the symposium and some of the suggested applications of income contingent loans: the Higher Education Contribution Scheme; as an alternative to grants-based drought policy; for the recompense of low level criminal fines; with respect to the payment of white collar crime offences; concerning funding models for the development of Indigenous land; for housing credits for low income earners; and as a basis for R & D funding.
Aspects of the analytical, policy and empirical bases of income contingent loans are considered, with relatively more attention being paid to Australia’s experience with HECS. Several other applications are examined in less detail, but there is considerable published research in most of these areas. An attempt is made to draw out the major similarities in, and differences between, the conceptual bases of these apparently quite disparate income contingent loan applications.