HECS-style loans can help beat the coronavirus cash crisis

20 March 2020

These are days of anxiety and fear - including for businesses and people bracing for the economic fallout of COVID-19.

Income- and revenue-based loans are the best way to assist households and businesses hit by the economic shocks of COVID-19 and to help stave off a recession, says a leading ANU economist.  

Professor Bruce Chapman is calling on governments to roll out so-called income-contingent (ICL) and revenue-contingent loans (RCL) in the face of the coronavirus crisis. 

Professor Chapman designed the world's first income-contingent loan, the Higher Education Contribution Scheme, known as HECS.  

HECS allows students to enrol in universities without paying up-front tuition, instead repaying fees once their earnings reach a certain level. The system is now used in 10 other countries. 

Professor Chapman said a similar model can be used for taxpayers and businesses bracing for a hit to income or revenue due to COVID-19. 

"These are days of anxiety and fear - including for businesses and people bracing for the economic fallout of COVID-19," he said.   

"It is very welcome news that Australian Government might be considering 'HECS-style loans' as part of stimulus to help counteract the recession forces accompanying the global coronavirus crisis.   

"Income-contingent loans can be applied in a variety of ways, including for drought relief, solar energy, business R&D or extended paid parental leave."  

Professor Chapman is proposing small loans for individuals facing financial trouble, including anyone who is laid off. 

"This could be a loan of $5000, enough to tide people over until their fraught employment situation becomes clearer. Repayments would be based on personal income and designed to minimise non-repayments of the debt," he said. 

"When it comes to businesses struggling with the effects of coronavirus, the collection arrangements would have to be based on revenue rather than income.   

"The elegance of RCL as a response to short-term business problems is that we have all pieces of the puzzle already in place. So we can act quickly and effectively."  

Professor Chapman said income- and revenue-based loans would also be the fairest and most sensible form of economic stimulus at a government's disposal.   

"Governments can provide very large sums of money in the form of grants or tax relief, but with enormous future costs to the state of the budget," he said.  

"Or governments can extend normal concessional loans now in use, which have all the repayment risks and uncertainties associated with conventional borrowing.  

"Instead, the insurance benefits of contingent debt have become very clear from our 30-year experience with HECS, and the simplicity and equity of comparable loans for business in the form of RCL are also compelling."