Financing Lifelong Learning Miguel Palacios cost of attending school and the<sup>benefits from pursuinga particularcareer in a particular</sup> school. In doing so the graduate<sup>tax losesoneof the most desirable characteristicsof</sup> HCCs: the potential to convey information<sup>to the marketregarding the value of</sup> education. Therefore, the potential<sup>pressureon educationalinstitutions createdby</sup> information regarding the expected<sup>valueof educationfrom particularinstitutions and</sup> careers would not exist with<sup>the graduatetax.</sup>

# _Income-Contingent Loans_

The last income-contingent<sup>repayment schemethat isdiscussedhereis the income-</sup> contingent loan (ICL). An ICL<sup>collectsa percentageof incomefrom a graduate</sup><sup>_until the_</sup> _value of the loan has been repaid_<sup>_or until a maximum repayment period has been_</sup> _reached._ Income-contingent loans<sup>have been the most publicized"new instrument"for</sup> financing education and there<sup>has beena growing bibliography that supports them.Asa</sup> result of this, several countries<sup>have implemented income-contingent repaymentschemes.</sup> The main parameters of ICLs<sup>are theinterest rate, the repayment period,the percentage</sup> of income paid by the student, the<sup>collectionmechanism,andthe conditionsof</sup> termination of a student obligation.

The conditions of termination of<sup>a student'sobligationare of particular importancein</sup> ICLs because they determine<sup>whofills the gap left by a studentwho doesnot earnenough</sup> to repay the loan and interest.<sup>Traditionally two answers have beengiven:other students,</sup> and government. In the former<sup>case, students aregrouped in cohorts and are expected to</sup> repay until the cohort has completely<sup>repaidthe loan,evenif that entailssomestudents</sup> paying _more_ than 100% of the<sup>value of the loan.The excessthat some students pay is</sup> used to cover for the losses generated<sup>by low-income-earners. Whengovernmentcovers</sup> the loss from incomplete payments,<sup>studentsaresimply expected to repay100% of the</sup> loan. I show in "Human Capital<sup>Contractsand Human Capital Options"(See Palacios</sup> (2001)) that there is a third alternative<sup>for coveringthe unmet paymentsthat consistsin</sup> recognizing the low-income protection<sup>offered by income-contingentloans as a financial</sup> option. If this alternative is<sup>followed, each student would be required to pay a percentage</sup> above the total value of the<sup>loanto "pay"for theoption.The extra payment each student</sup> makes should then suffice to cover<sup>theexpensesnot paid by others.</sup> As discussed for Human Capital<sup>Contracts,income-contingentloans can be collectedby</sup> government to make use of existing<sup>institutions that estimateindividuals'incomesand</sup> collect taxes based on it. Barr<sup>(2001)hasargued in favorof systemsin which the tax-</sup> collection agency, or the national<sup>insurancecontribution system collectspayments.He</sup> argues that the marginal cost for<sup>the stateis relativelylow giventhe machinery it already</sup> has in place. Chapman's findings<sup>(1997)regardingthe collectioncostfor the Australian</sup> government support this position.<sup>Thisproposalcan beextendedto includeindependent</sup> authorities. Johnstone (2001b)<sup>has arguedagainst theapplicability of such an</sup> arrangement in other countries<sup>wherecollectingpayments throughthe taxmachinery</sup> might hamper the disposition of<sup>citizens to declareand pay their taxes, or where tax-</sup> collection agencies are not capable<sup>of collecting payments.</sup> 20