Enrollment fees are reasonable, but it should be possible to finance them through special loans whose repayment is based on subsequent income. Student loans of this kind, based on the Australian model, could also be used extensively in Germany. This is the result of a recent study conducted by the RWI and the Australian National University. It shows that an “income-contingent loan” considerably reduces the graduate’s perceived financial burden.

Giving German students a share in the expenses of their studies by means of enrollment fees makes economic sense. In order to ensure efficiency and equality, however, it should be possible to finance the enrollment fees using special loans which are available to as many students as possible and can be paid off easily. The “income-contingent loan” (ICL) is a fee model which possesses these attributes. A current study conducted by the RWI and the Australian National University arrived at these findings. In contrast to conventional student loans, the ICL measures the monthly repayment sum based on the subsequent income of the student in question and may not exceed a fixed proportion of his or her income. This prevents excessive financial burdens on the graduates. It also reduces the number of graduates who are unable to pay back their loans. Models of this kind have been used successfully in Australia and New Zealand for many years.

A frequent argument against enrolment fees is that the fear of being unable to pay back a loan taken out to finance the fees or having to undergo severe financial restrictions could deter many students from studying. Income-dependent loans based on this ICL model would be suited to assuaging this fear of potential students.

West German University Graduates Have the Highest Income

Enrollment fees of € 3,500 per year over a 5-year period were assumed for the model calculations in the study. This results in a total sum of € 17,500 to be paid back within 10 years. The 2007 “Microcensus”, compiled by the Federal Statistical Office, provided the information on the income conditions of male and female graduates in West and East Germany. According to the above census, male West German graduates earned the most, on average, in 2007 (gross annual income: € 51,525), followed by male East German graduates (€ 33,629), female West German graduates (€ 26,930) and female East German graduates (€ 24,600).

The calculations indicate that, with conventional loans, university graduates with an average income would have to spend 7.8 to 14.1% of their gross income paying off the loans in the first year of repayment. In lower income groups, the burden would rise to up to 26.8%.

ICL: Installments should not amount to more than 8% of the gross income

Unlike conventional loans, the repayments for income-dependent credits such as the ICL are based on income. The repayment usually begins 2 years after graduation, as long as a certain income has been reached by this point in time. The maximum limit for the installments is fixed as a proportion of income. As a rule of thumb, not more than 8% of the gross income should be spent on amortizing the loan. The state assumes default guarantees if students are unable to pay back their loans.

Based on this scenario, the repayment period would amount to 7 to 12 years for graduates with an average income or 11 to 22 years for the lowest income groups. These findings are comparable with those of other countries, such as Australia and New Zealand, where income-dependent student loans have been successfully used for years.

For further information, please contact:
Pro. Dr. Thomas K. Bauer Tel.: +49 201 81 49-264
Sabine Weiler (Press office) Tel.: +49 201 81 49-213

This press release is based on Ruhr Economic Paper #244 „Student Loan Reforms for German Higher Education: Financing Tuition Fees“. It is available from http://www.rwi-essen.de/publikationen/ruhr-economic-papers/ as a PDF file.