Funding Higher Education in Australia: A Comprehensive Analysis of Income Share Agreement as an Alternative to Income Contingent Loans

Steven Mark Holliday, Ergun Gide

Abstract


In today’s knowledge economy, for any Higher Education system to be effective in achieving its educational and training aspirations, the funding solutions must also be carefully considered. Human Capital Contracts are an emerging alternative means for financing the up-front investment cost of university students. This method involves investors financing the development of a students’ human capital based on their expected future incomes and taking a share of their future income for a defined period as a return on their investment. This market based concept of allowing the free market to fund a student’s higher education was an idea proposed by Milton Friedman in 1945.

In recent years, such an approach has begun to emerge in the United States in particular. This is an innovative style of student education financing whereby in some cases the investor will receive back more than their investment outlay (and sometimes less), and provided the net return across their student investment portfolio is positive and at an acceptable rate of return, the investor benefits from this arrangement. The student in return gains a level of certainty over their financing both in terms of repayment levels and repayment periods, and they only pay according to their own success or otherwise.

In Australia, student fees are funded through an income contingent loan system which is well established, however, this system is struggling with high debt levels and high proportional write offs.

Would an Income Share Agreement (ISA) program possibly be an alternative scheme which may take pressure off the Australian Government funding by transferring the risk to the private sector? Ideally, such a scheme would maintain the basic principles behind the current system, but allow for private investors to predominantly fund the scheme. Potentially, principles from both financing systems may provide a framework for a new innovative model into the future.


Keywords


HECS (Higher Education Contribution Scheme), Human Capital, Funding, Higher Education, ISA, Income share agreements

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References


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