Analyzing Student t Loans: A User Guide

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1 Analyzing Student t Loans: A User Guide Bruce Chapman Crawford School of Economics and Government Australian National University Kiatanantha Lounkaew Dhurakij Pundit University Bangkok, Thailand

2 Outline Introduction and Context, Professor Bruce Chapman Important features of student loans What to analyze? Interest rate subsidies and repayment burdens Comparing normal loans to ICLs Summary

3 Important Features of Student Loans Student loans design Interest rate subsidies Repayment burdens Example from Thailand A different way: ICLs A different way: ICLs Problem with ICLs

4 What to Analyze? Implicit interest rate subsidies (Iss) Repayment burdens (RBs) Default Trade-off between ISs and RBs

5 How to Analyze Implicit Interest Rate Subsidies The role of interest rates Implicit interest rate subsidies Implication for student loans

6 The Role of Interest Rate Even without inflation, $100 today will not be equal to $100 next year. This is because of the role of interest rates. A policy design which deals with the stream of money overtime has to take into account the role of interest factor.

7 Implication for Student Loans Subsidy The different between the initial outlay and the PV of total repayment can be thought of as SUBSIDY.

8 Implication for Student Loans +interest By imposing real rate of interest, implicit it interest t rate subsidies can be eliminated.

9 Repayment Burdens RB= Repayment at time t Income at time t Higher repayment burdens come from Higher interest rate Higher loan size Shorter t repayment period Low graduate incomes

10 Repayment Burdens: How Much Is Too Much? A rough yardstick, used in several countries, is that loan repayments should not exceed 8 to 10% of a graduate s income (Woodhall, 1987). Salmi (2003) notes that in Venezuela the government loan agency has established 15 per cent as the ceiling for monthly repayments.

not exceed 8 to 10% of a graduate s income (Woodhall, 1987).

11 Default Knowledge about graduate income distributions together with the 8-percent rule allows us to make a rough prediction about potential defaults.

12 Case Study: The Thai Student t Loans Fund (SLF)

13 Important Features of the SLF % of the loan 14 Annual repayment is in % of total loan 12 6-year interest grace period year repayment grace period 2 1% nominal interest rate (-3 real interest) Year

period 10 8 6 4 2-year repayment grace period 2 1% nominal

14 Important features of the SLF Baht 60,000 50,000 Loans Repayments 40,000 30,000 20, , Year

15 SLF Implicit Subsidies Sources of Subsidies Subsidies (%) Interest rate subsidies 54 Default 15 Administrative cost 3 Total Implicit it 72 subsidies

16 SLF RB: Assumptions and Method The total debt size is 200,000 Baht (2008). This is a weighted average of the SLF loan size in 2006 adjusted by inflation (assumed to be 4% per annum). The repayments are calculated l according to the repayment rules discussed above. Hardships are calculated for Q20 male and female (see Figures)

17 Male Age-Income Profiles Annual income (Baht) 600,000 Q75 500, , ,000 Q50 200,000 Q20 100, Age

23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

18 Female Age-Income Profiles Annual income (Baht) 600, , ,000 Q75 300,000 Q50 200, ,000 Q Age

19 SLF RB: Results Q20 % of total income 45% 40% 35% 30% 25% 20% 15 % 10 % 5% 0% Female Male Age

Female Male 18 19 20 21 22 23 24 25 26 27

20 Assessing Potential Default Use the 8-percent rule as a cutoff. Calculate proportion of graduates whose incomes fall below the 8-percent benchmark. If the repayment is $200 per month, t e epay e t s $ 00 pe o t, graduates with income of $2,500 or lower are potential defaulters ($200/0.08=$2,500).

21 Illustrating Interest Rate Subsidies-Repayment Burden Trade-Off. % debt collected 30% %debt collected = 47.0% 25% 20% 15% 10% 5% 0% r*=6.2% 0% 1% 3% 4% 5% 6% 8% 9% 10% 11% 13% 14% 15% 16% 18% Nominal interest rate charged

22 Basic problems with normal student loans in developing countries High interest rate subsidies make repayment easier But there are still big problems for low income graduates with repayment burdens Eliminating interest rate subsidies makes repayment burdens huge for most graduates

23 A different approach: ICLs What is an ICL? Why do we have them? Where do they exist? What is the major problem with ICL: collection, collection, collection

24 Summary Student loans needed Normal loans have high interest rate subsidies AND high repayment burdens Eliminating subsidies means impossible repayment burdens ICLs can solve these problems but they have to be collected properly, usually with the income tax system

25 Thank you!

Higher Education Financing and Inequality The Critical Role of Student Loan Scheme Design: Illustrations from Indonesia, Vietnam and Thailand

Higher Education Financing and Inequality The Critical Role of Student Loan Scheme Design: Illustrations from Indonesia, Vietnam and Thailand By Bruce Chapman Introduction Many Asian countries in recent