Why income-contingent loan repayment won’t solve anything

Thursday, April 5, 2012


By Martin Robert

Quite the smokescreen, this income-contingent loan repayment (ICLR) program that was  just proposed by the Charest government! If the strike were to end following this offer, the Liberals would have not only entirely defeated us on the question of tuition increases: they would have also managed to make a decision that increases total student debt - and benefits banks - look like a reasonable compromise.

Why is this ? In Quebec, private banks – and not the government – loan money to students as part of the loans and bursaries program. Those who incur debt in order to study contract loans with financial institutions, and these institutions cash in on the interest these loans generate. This being said, what the government is proposing through ICLR is not a reduction of student debt (since tuition increases would still happen), but a new method of paying back your loans. Low-income students would be asked to take the hit by incurring more debt to be able to pay for tuition increases, under the pretext that they will be able to reimburse this loan according to their income, when the time has come. Sounds a lot like “buy now and pay later” – with the added injustice that there would still be user fees in education, with all the effects this has. Sounds like a win-win situation for the banks.

If we dig a little deeper, we can see how ICLR is part of a broader trend towards privatizing the financing of education. The idea or ICLR is not new: it was first developed by the economist and theorist of neoliberalism, Milton Friedman (1912-2006). In his 1962 book, Capitalism and Freedom, Friedman talked about ICLR as a way of guaranteeing the capital invested in the form of student loans. Friedman writes: “Investment in human beings cannot be financed on the same terms or with the same ease as investment in physical capital. It is easy to see why. If a fixed money loan is made to finance investment in physical capital, the lender can get some security for his loan in the form of a mortgage or residual claim to the physical asset itself, and he can count on realizing at least part of his investment in case of default by selling the physical asset. If he makes a comparable loan to increase the earning power of a human being, he clearly cannot get any comparable security. In a non-slave state, the individual embodying the investment cannot be bought and sold. [..] A loan to finance the training of an individual who has no security to offer other than his future earnings is therefore a much less attractive proposition than a loan to finance the erection of a building: the security is less, and the cost of subsequent collection of interest and principal is very much greater.”[1]

It then becomes apparent that ICLR guarantees investors can recover their capital from the very wages of those who find well-paying jobs, thereby compensating for their less fortunate colleagues. In this respect, ICLR is nothing less than the creation of an investment market in training, where banks speculate on certain students which they grant loans to, with the hope of having made a profitable investment.

Here’s where things get interesting: even if certain loans aren’t paid back, banks benefit from this type of system anyways. In fact, ICLR allows for an overall increase in the number of people contracting loans as well as an overall increase in the amount of money being loaned out at any given point in time. Banks suddenly have access to a mass of capital, accrued in the interval between the moment the loan is given and the moment it is entirely paid back, on which they can speculate. Banks can thus increase their profit margins thanks to the fact that it becomes easier for students to incur debt.

Besides, if the reimbursement of a loan is linked to the future salary of a given student, one could assume that banks might get cold feet when the time comes to finance the degree of a young, precarious worker who wishes to work in a « low value-added » program. One might expect banks to give preference to students who are already solvent thanks to their social origin, as well as those who are headed straight to a lucrative career thanks to their field of study. This type of system, as Friedman suggested, opens the door to a case-by-case assessment of the creditworthiness of people who take on loans – similar to life insurance companies.

To summarize, the introduction of ICLR by the government not only sets aside the real debate on tuition fees, but entrenches Quebec even more in the logic of user fees for public services. At best, it’s a way to sugar-coat the hike, while allowing for the State to divest from education while privatizing its financing. In addition, by announcing this type of measure after seven weeks of strike, the government conveniently avoids any real negotiations with the student movement and pushes student strikes up against a wall a few days before the deadline to settle. If the government manages to throttle a strike movement unparalleled in the history of Quebec, it will have managed to perform the biggest scam in the history of education policy in recent years. In the current context, that would be no small feat.

Translation: Rouge Squad

[1] Friedman, Milton. Capitalism and Freedom. Chicago, IL, USA: University of Chicago Press, 2009 [1962]. p 119.