Policy options for student loan schemes: lessons from five Asian case studies

Transcription

1 Volume 1 Number 6 Policy Research and Dialogue Student Loans Schemes in Asia Policy options for student loan schemes: lessons from five Asian case studies Adrian Ziderman United Nations Educational, Scientific and Cultural Organization UNESCO Bangkok

2 Policy options for student loan schemes: lessons from five Asian case studies

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5 Ziderman, Adrian Policy options for student loan schemes. Bangkok: UNESCO Bangkok/ IIEP, p. 1. Student loans. 2. Educational systems. 3. Higher education. 4. Educational grants. 5. Financial aid. I. Title. The views and opinions expressed in this booklet are those of the author and do not necessarily represent the views of UNESCO, UNESCO Bangkok or of the IIEP. The designations employed and the presentation of material throughout this review do not imply the expression of any opinion whatsoever on the part of UNESCO or IIEP concerning the legal status of any country, territory, city or area or its authorities, or concerning its frontiers or boundaries. Published by: United Nations Educational, Scientific and Cultural Organization UNESCO Bangkok Mom Luang Pin Malakul Centenary Building 920 Sukhumvit Road P.O. Box 967, Prakanong Post Office Bangkok 10110, Thailand UNESCO Bangkok web site: and International Institute for Educational Planning 7-9 rue Eugène Delacroix, Paris IIEP web site: Cover design: Keen Publishing Typesetting: Linéale Production ISBN: UNESCO 2004 Printed in Thailand

6 Contents List of abbreviations 7 List of tables 9 List of figures 10 Preface to the series 11 Chapter 1. Introduction Background Outline of the paper 17 Chapter 2. The five case studies Case studies: general description China Hong Kong SAR, China Republic of Korea The Philippines Thailand Dominance of mortage-type schemes 27 Chapter 3. Why student loans schemes? Alternative loans scheme objectives Country case studies: loans scheme objectives Policy alternatives to student loans schemes 38 Chapter 4. Organizational framework Unitary scheme versus multiple schemes Centralized or decentralized loans schemes? 43 Chapter 5. Assigning institutional roles: funding Provision of capital Who pays the interest subsidy, who bears the risk? 51 Chapter 6. Assigning institutional roles: borrower selection and loan distribution The loan distribution process Alternative distribution pathways: case study experience Weighing the alternatives Adequacy of loan size 60 5

7 Contents Chapter 7. Assigning institutional roles: loan repayment collection Institutional roles in collection Case study practice Minimizing default 67 Chapter 8. Financial viability of loans schemes Factors leading to low loan recovery The individual loan account Loan recovery: the overall perspective Loans scheme viability 76 Chapter 9. Equity and assistance to the poor: the role of subsidies When are loan subsidies justified? Targeting Case study experience with targeting Defining eligibility Reach of loans schemes: case study experience 87 Chapter 10. Case study loans schemes: major strengths and weaknesses China Hong Kong Republic of Korea The Philippines Thailand 90 Chapter 11. Key issues in design and reform: lessons from the case studies Applying lessons from international experience Issues emerging from the case studies Towards a typology of good practice 104 References 107 Glossary 109 Appendix 115 6

8 List of abbreviations ADB CHED COE COI GCSLS GDP GECP GFIs GSSLS Asian Development Bank Commission on Higher Education (Philippines) Centres of Excellence Cost-of-living index General Commercial Student Loans Scheme (Chinese commercial scheme) Gross domestic product Government Employees Pension Corporation (Republic of Korea) Government financial institutions (Philippines) Government Subsidized Student Loans Scheme (Chinese subsidized scheme) HECS Higher Education Contribution Scheme (Australia) IIEP International Institute for Educational Planning KLWC Korea Labour Welfare Corporation KRF Korean Research Foundation KTB Krung Thai Bank KTP Korea Teachers Pension Corporation LSFS Local Student Finance Scheme (Hong Kong SAR subsidized scheme) MOE Ministry of Education / Ministry of Education and Human Resources Development (Republic of Korea) MOL Ministry of Labour MUA Ministry of University Affairs (Thailand) NLS Non-means-tested Loan Scheme (Hong Kong SAR nonsubsidized scheme) 7

9 List of abbreviations ONC SFAA SLSC SNPL TRF UNESCO Office of the National Education Commission (Thailand) Student Financial Assistance Agency (Hong Kong SAR) Student Loans Scheme Committee (Thailand) Study Now, Pay Later scheme (Philippines) Thailand Research Fund United Nations Educational, Scientific and Cultural Organization 8

10 List of tables Table 2.1 Table 3.1 Table 3.2 Table 3.3 Table 4.1 Table 4.2 Table 5.1 Table 7.1 Table 8.1 Table 8.2 Table 9.1 Table 9.2 Table 9.3 Table 10.1 Table 11.1 Table A1.1 Table A1.2 Table A1.3 Case studies: general description of loans schemes Alternative objectives of student loans schemes Country case studies: loans scheme objectives Policy alternatives to student loans schemes Unitary or multiple schemes: case study practice Centralized or decentralized schemes: case study practice Financing loans schemes: functions and agents Measures/sanctions against repayment default Factors leading to less-than-full loan recovery Case studies: repayment and recovery ratios Justification for subsidized loans Targeting and reach: case study loans schemes Setting the income ceiling for loan eligibility Loans schemes: major strengths and weaknesses Characteristics of good practice loans schemes Treatment accorded to various loans schemes in case study reports Case studies: major features of selected loans schemes Lending conditions in case study loans schemes 9

11 List of figures Figure 5.1 Figure 6.1 Figure 6.2 Figure 7.1 Figure 9.1 Figure 9.2 Higher education budget allocations, with cost sharing The loan distribution process: simplified presentation Alternative scenarios for loan distribution Alternative scenarios for loan repayment collection The egg diagram : reaching the poor Defining eligibility 10

12 Preface to the series This synthesis study is part of a series of in-depth studies on the functioning of government-sponsored student loans schemes in Asia. The study assesses the lessons learned for national policy design and reform from a regional comparative policy review on student loans schemes undertaken in countries in Asia between 2001 and The review was carried out in the context of a project undertaken by the Bangkok-based UNESCO Asia and Pacific Regional Bureau for Education (UNESCO Bangkok) in association with the International Institute for Educational Planning (IIEP). It covered five countries and territories including P.R. China, Hong Kong S.A.R. China, the Republic of Korea, the Philippines and Thailand. Additional studies have also been commissioned by IIEP. Most countries in Asia are experiencing a dramatic increase in demand for higher levels of education at a time of both severe public budget constraints and profound overhaul of education systems aimed at significantly increasing their impact and relevance. In an attempt to ease the burden on public budgets, a number of countries have introduced student loans schemes, hoping to recover costs and increase the revenue base for the expansion of education, while at the same time providing opportunities for poorer segments of the population to access higher levels of education. In an attempt to increase the knowledge base available to governments and provide practical insights which might be useful for national education policy, the UNESCO Asia and Pacific Regional Bureau for Education initiated in 2001 a regional comparative study to examine the performance of student loans schemes in a number of countries in Asia. The study is intended to be instrumental in improving the efficacy and financial efficiency of existing schemes and in providing a comparative information base for countries intending to introduce a student loans scheme. A joint endeavor by UNESCO Bangkok and IIEP, this regional policy study was initiated and its implementation co-ordinated by the Education Policy and Reform Unit (EPR) 1 at UNESCO Bangkok. It benefited from 1. Former Planning and Sector Analysis Unit (PSA), restructured in

13 Preface to the series technical support by IIEP and was able to draw on a wide range of regional and international expertise available at research institutes, universities and ministries in the participating countries. Five research teams led by academics and senior-level practitioners were involved in producing the monographs. UNESCO Bangkok and the Korean Educational Development Institute (KEDI) hosted several research seminars bringing together research teams and practitioners from the countries participating in the project. Partner institutions involved in the study included the Korean Educational Development Institute (KEDI); Huazhong University of Science and Technology (Graduate School of Education), Wuhan; Peking University (Graduate School of Education); the Chinese University of Hong Kong (Department of Educational Policy and Administration); the Commission for Higher Education (CHED) in the Philippines (Office of Student Services, Office of Policy Planning, Research and Information) and the Asian Development Bank collaborating in the framework of an ongoing Education Sector Development Program in the Philippines. Researchers and officials from several universities, education and finance ministries and national agencies such as student loans offices in the participating countries collaborated in the preparation of the case studies. UNESCO Bangkok and IIEP would like to thank all those individuals who provided their expertise and professional experience to this research and therefore helped to assemble a considerable cross-sectoral information base required for comparative loans policy analysis. The important contributions by individual researchers and authors are acknowledged in this book. The series of studies has benefited from the technical expertise of Adrian Ziderman, Professor of Economics at Bar-Ilan University, Israel, and UNESCO lead consultant, who provided research guidance and prepared the synthesis study. The common framework and methodology for the case studies was derived from a study of the new Thailand student loans scheme, written by Adrian Ziderman in the context of a UNESCO- Asian Development Bank Technical Assistance Project in Igor Kitaev, Programme Specialist (education financing), served as resource person from the IIEP in addition to authoring one of the studies. Dominique 2. Thailand education management and finance study, UNESCO-Asian Development Bank, Technical Assistance Project (T.A THA),

14 Preface to the series Altner, Chief, Education Policy and Reform Unit (EPR), UNESCO Bangkok, with support from Toshiyuki Matsumoto, Assistant Programme Specialist, EPR, initiated the project and ensured the professional coordination throughout the study. Sheldon Shaeffer, Director UNESCO Asia and Pacific Regional Bureau for Education, Bangkok Gudmund Hernes, Director International Institute for Educational Planning, Paris 13

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16 Chapter 1 Introduction 1.1 Background State-supported student loans are increasingly on the policy agenda in many countries. Student loans schemes are in place in over 50 countries around the world, almost all of them are concerned with tertiary education. In many other countries, proposals to introduce a student loans scheme constitute a recurring theme in political debate. Loans schemes are of particular interest to policy makers because they are able to contribute to the solution of a range of pressing policy problems that governments are facing. They are able to relieve pressures on national budgets by facilitating greater cost sharing through the raising of tuition and other university fees; liberated resources may be used in areas of greater priority for society, both outside and within the education sector and notably basic education (Psacharopoulos, Tan and Jimenez, 1987). Greater cost recovery can provide additional funds for the expansion of the university system, to accommodate ongoing increases in the social demand for tertiary education. Targeted at disadvantaged groups, subsidized loans schemes can lead to greater access of the poor to university education, thus contributing to improved social equity. And loans offered at favourable conditions for study in particular fields can lead to the loosening of skilled manpower bottlenecks that inhibit national and social development. The record of success, particularly for loans schemes in developing countries, has been mixed. While some schemes have proved to be broadly successful, the outcomes of loans schemes have frequently been disappointing, both in terms of meeting set objectives and in terms of financial sustainability. Where schemes have been less than successful, the lack of success has stemmed from weaknesses in the process (administrative deficiencies, excessive default or poor targeting) or the causes were in-built and, in particular, related to excessively generous loan conditions and high subsidies. 15

17 Policy options for student loans schemes: lessons from five Asian case studies Government-sponsored student loans schemes operate in a number of countries across Asia. Student loans schemes have been established in Australia, Mainland China, Hong Kong SAR, India, Indonesia, Japan, Kazakhstan, the Republic of Korea, 3 Malaysia, Mongolia, Pakistan, the Philippines, Sri Lanka, Singapore, Uzbekistan, Viet Nam and Thailand. As in other regions, these schemes differ markedly from country to country. Some schemes are well established and of long standing (India) while others have been set up only recently (Kazakhstan and Thailand); some reach a large percentage of enrolled students (Hong Kong SAR, China and Thailand) while others, relatively minor in scope, cover rather few (Philippines). Major objectives, too, differ from scheme to scheme, with the sharpest division drawn between those countries where loans schemes aim mainly at cost recovery (Singapore, Hong Kong SAR, China) and those with such social objectives as increasing higher education participation and access amongst less well-off groups (Philippines and Thailand). In some instances, administrative and other difficulties have led to the eventual abandonment of loans schemes (Indonesia and Sri Lanka); in other countries, planned schemes were stillborn though since revived (Mongolia). In a number of cases, governments have displayed an interest in reforming existing loans schemes that are in place or introducing new schemes. Policy reform in the field of student finance, as in other areas, should be guided by international experience of good practice (on what has worked well) and of mistakes to be avoided. But the general lack of available indepth appraisals of existing loans schemes in Asia has constituted a serious barrier to successful reform in the region. While some detailed appraisals relating to the workings of loans schemes in a number of countries have been carried out, these are not readily accessible; they are either unavailable in English or, being restricted internal documents of international organizations, are not in the public domain. The central aim of the UNESCO Bangkok/IIEP Regional Study on Student Loans in Asia has been to take some steps forward in filling this knowledge gap. The project sponsored five in-depth case studies of loans schemes in Asia, set in four countries: Mainland China and the Special Administrative Region of Hong Kong (SAR, China), the Republic of Korea, the Philippines and Thailand. The aim was to include loans schemes with 3. The adjective Korean is used in this booklet to refer to the Republic of Korea. 16

18 Introduction differing objectives, institutional structures and financial arrangements, as well as contrasting economic and political backgrounds. The case studies, focusing on the performance of these schemes, employed a broadly common framework and methodology, thus giving the opportunity for comparative analysis of the strengths and weakness of loans schemes operating within differing contexts. An earlier study of the new Thailand student loans scheme (reported in Ziderman, 1999), was used as a model for the other case studies conducted by local partners, 4 thus providing the necessary framework and methodology for the other case studies. These studies, which have already been published in the present monograph series, have been valuable in adding significantly to available case study material on student loans scheme operation and outcomes in Asia. Taken as a whole, the five case studies provide a broad canvas of differing experiences, practices and degrees of success. They constitute a rather unique database on the workings of student loans schemes in a defined region. No less important, however, is the opportunity afforded for integrated, comparative analysis the aim of the present study based on contrasts and similarities found across the case studies. The overall purpose of the comparative analysis in this monograph is not to provide an integrated summary of the five case studies but rather to draw out, from the loans scheme experience in the five cases, broader lessons for policy. 1.2 Outline of the paper The paper consists of 11 chapters. Following this introduction, a brief synopsis of the main workings of the five cases is provided in Chapter 2. Chapter 3 discusses alternative objectives of student loans schemes. Subsequent chapters deal with the organizational structure of loans schemes (Chapter 4), the funding of loans schemes (Chapter 5), the allocation of loans and repayment collection (Chapters 6 and 7, respectively), the financial viability of loans schemes (Chapter 8), equity, loans scheme subsidies and targeting (Chapter 9). In Chapter 10, an analysis of the strengths and weaknesses of case study loans schemes is provided while the final chapter, based on lessons learned from the case studies, discusses key issues in the design and reform of student loans schemes. 4. This study was carried out in the framework of the Thailand Education Management and Finance Study, UNESCO Asian Development Bank, Technical Assistance Project (T.A., 2996-THA), 1999, executed in association with the Office of the National Education Commission (ONC) and Thailand Research Fund (TRF). 17

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20 Chapter 2 The five case studies 2.1 Case studies: general description This chapter describes in summary form the principal features of the main loans schemes in the five case studies. A brief description of the loans schemes in place in each case study is given in Table 2.1. Table 2.1 Case studies: general description of loans schemes Case study China Description Two national schemes, still being developed. One scheme is subsidized by government, while the second operates on commercial lines. Limited coverage but growing. Hong Kong SAR Republic of Korea The Philippines Thailand Veteran, centralized loans scheme (part of a comprehensive framework, providing grants and loans to poor and non-poor students). Broad regional coverage. A number of separate schemes, run independently and aimed at different target populations. Most schemes are based on existing financial funds. Very small, long-established national loans scheme, complemented by two new schemes (regional and high-level institutions). Marginal in total size and impact. Virtually no loan repayment. New, highly subsidized, national loans scheme with broad coverage; includes students enrolled at the upper secondary and tertiary levels. Low financial viability. 19

21 Policy options for student loans schemes: lessons from five Asian case studies The reader is referred to the original case studies for a fuller, indepth treatment: China (Shen and Li, 2003); Hong Kong, SAR (Chung, 2003); the Republic of Korea (Kim and Lee, 2003); Philippines (Kitaev, Nadurata, Resurrection and Bernal, 2003); and Thailand (Ziderman, 2003). 5 Apart from Thailand, which has a single loans scheme with very broad coverage, all the remaining case studies exhibited multiple loans schemes. Not all of these schemes are discussed in detail in the case study reports, since the central objective was to concentrate on lessons to be learned rather than to provide comprehensive coverage of all the schemes. A similar, eclectic approach is adopted in this report. Table A1.1 in the Appendix lists all the significant loans schemes in place, in each case study, with an indication of the level of detail provided in the case study reports for each scheme. The exclusion of the innovative and much discussed Australian scheme from the comparative study may occasion some surprise. Australia is not included for two reasons. First, the Australian case has already been extensively analyzed and documented; a recent account is provided in Chapman and Ryan (2002). Second, some of the central aspects of the scheme itself, particularly the system of income-contingent loan repayments, are not readily transferable to the rather different institutional setting in other countries in the region (Johnstone, 2001); this would be an example of inappropriate institutional transfer across countries. Indeed, apart from the Australian and New Zealand income-contingent schemes, all of the loans schemes at present in operation in the region (including all those examined in the case studies) are mortgage-type loans schemes. Thus our focus will be on mortgage type loans schemes (to be defined subsequently), which is the prevailing form of student loans scheme present in developing countries. However, some consideration of the efficacy of income-contingent loans schemes in developing countries will be provided in Chapter After the case studies were completed, institutional development has continued apace in some of the loans scheme cases, including both the introduction of new schemes and ongoing reforms of existing schemes. Thus, while they are not discussed in the case study reports, reference will be made to these developments at appropriate points in this paper. 20

22 The five case studies 2.2 China Student loans schemes were first introduced in China in The two national schemes, both formally established in 1999, are still under development; one is subsidized by government, the second operates on commercial lines. The Government Subsidized Student Loans Scheme (GSSLS) is the main loans scheme in China. It is aimed at poor students enrolled full-time in regular public universities. Loan capital is provided by four state-owned commercial banks. While educational institutions initially process loan applications, the commercial banks are responsible both for selection, lending out of loans and collection of due repayments; they also bear most of the default risk. The banks receive the commercial rate of interest on loans, half of which is paid by government. While the commercial banks put up the loan capital, the total loan volume is constrained by the system of institutional quotas, based on the total amount of interest support available from government and by the willingness of commercial banks to provide loans (if a bank does not want to lend more, it will offer fewer loans than indicated by the quota). There are no formal guarantors on loans; students own personal credit acts by way of guarantee, with no consideration of an applicant s credit history. Repayment is due four years after graduation. By the end of 2001, 272,000 students had received loans from the subsidized loans scheme over 30 per cent of applicants. But overall coverage is very low: only 3.8 per cent of students were in receipt of a loan. The relatively low earnings differential received by graduates, together with the short four-year repayment period imposes a relatively high burden on borrowers, of about 24 per cent of annual income. The scheme does not act very equitably, since the chances of receiving a loan are lower for very needy students and differ amongst students of similar economic status depending on the educational institution. Since banks shoulder most of the default risk, they tend to discriminate against the more default-prone students the poorer students and those enrolled in institutions of lower standing. In addition, since local governments provide the interest subsidy for local institutions, poorer local governments are less able to supply interest rate subsidies to local universities. 21

23 Policy options for student loans schemes: lessons from five Asian case studies Unlike the government-subsidized scheme, the General Commercial Student Loans Scheme (GCSLS) operated by commercial banks (and rural credit co-operative unions) is open to students in private as well as public universities, and regardless of socio-economic status. Interest on loans is charged at the commercial market rate, without government subsidy. Repayment periods differ, because the various participating banks have their individual loan regulations. Since loans are guaranteed through the assets of parents/guardians, thus minimizing default risk, the scheme is limited in practice to students from middle and upper class families with the required assets for collateral. 2.3 Hong Kong SAR, China The student loans scheme in Hong Kong SAR is a major component of the governmental system of financial aid to students that has evolved over the past decades. It is at once the oldest of the five cases and, in many ways, the most successful. The scheme is operated by an autonomous public loans organization, the Student Financial Assistance Agency (SFAA). At present, the scheme consists of interest-free loans under the Local Student Finance Scheme (LSFS) (which are means-tested and take into account the financial situation of the student s family) and of the interest-bearing NLS loans (for which having student status is the only requirement). The loans are meant to cover living expenses, complementing the grants given towards academic expenses. The interestfree LSFS loan is sustained by continuing government subsidy, while the interest-bearing NLS loan is expected to operate on a no gain, no loss basis. Loan coverage is relatively high: In 2000/2001, some 28,000 students took up an LSFS loan and over 10,000 took up an NLS loan, together constituting some 50 per cent of the eligible student population. The allocation of student loans in Hong Kong has been mainly based on considerations of equity, efficiency and adequacy. First, students from less well-off families receive greater financial assistance. The loan entitlement varies according to a formula, which takes each applicant s family financial situation into consideration. The goal of the system is to ensure that no qualified student is deprived of higher education because of lack of funds. Second, the maximum amount of a loan is adjusted so as to correspond to the general living needs of a student. This adjustment is achieved through regular surveys of student expenses and the compilation of a Student Price Index. 22

24 The five case studies The allocation of financial assistance has also been used to encourage development in areas of study required by society. At different stages, various grants and loans in Hong Kong have been targeted at students in teacher training, information technology, financial services and creative media. Increases in university tuition fees in the 1990s which generated a vast amount of additional student applications, were also followed by a considerable increase in the number of awarded grants and loans. Indeed, a large portion of costs recovered through the tuition hike was offset by increases in grants and loans during the same period. Thus the development of the government student loans scheme has not reduced the government s financial commitment to higher education. Some commercial student loans schemes have emerged recently in Hong Kong. However, the scope of these schemes is rather limited and these loans are usually contingent upon the acceptance of other services provided by the banks offering the loans. 2.4 Republic of Korea There are six government-supported loans schemes for higher education in the Republic of Korea, covering about 16 per cent of student enrolment. Among these schemes, the Ministry of Education and Human Resources Development (MOE) and the Government Employees Pension Corporation (GECP) loan programmes are the largest, accounting for almost 86 per cent of all student loans. The MOE scheme is the largest of the six loans schemes run with government financial support. It disburses interest-subsidized loans to the poor over the entire higher education sector; it targets poor students, giving priority to students from unemployed and low-income groups. The MOE scheme uses commercial banks for a number of the loans scheme functions: loan fund provision, loan administration, repayment collection, etc. The Ministry only decides on the size of loans and on aspects of general policy, such as interest rates, selection criteria and quota for each institution, and makes up the interest difference. The GECP loans are available to government employees and their children and do not target the poor specifically. The GEPC scheme uses its own fund for the financing of loans and transfers the loan amount to the recipient s individual bank account. 23

25 Policy options for student loans schemes: lessons from five Asian case studies Both schemes usually cover tuition fees (including registration fees) but not living costs. The responsibility for repayment of MOE loans falls on the students themselves. They are able to delay payment until they receive higher earnings. In contrast, recipients of a GECP loan are government employees, who have to pay back the loan received for financing their children s education. A notable feature of the student loan system in the Republic of Korea is that the government budget is not the source of initial loan capital: this is put up by the commercial banks in the MOE scheme or provided from existing funds in the others. All schemes except one use commercial banks to administer loan payment and repayment collection. In 2003, the Korean government introduced a new student loan and scholarship programme, specifically targeted on engineering students. The objective of the programme is manpower needs and covers around 37,000 students (about 1 per cent of student enrolment). This scheme was introduced after the Korean case study had been completed. Student loans cover tuition fees only, and not living expenses; this is a particular problem for the poor. Of the six loans schemes, only two (including the MOE scheme) directly target the poor; the other four are directed at specific population groups, such as government officials, teachers or industrial workers. The loan programme of the MOE, the only sizeable scheme directed towards the poor, is not successfully targeted on this group. In practice, it may happen that loans are allocated to students that are not necessarily in financial need. This is because some universities and colleges allocate loans on a first-come, first-served basis and also, because some institutions apply merit-based and needs-based criteria in combination in the selection process. The total amount of loans provided by the six schemes came up to 970 billion won (or US$750 million) in The number of recipients was 488,900 in 2000, which is approximately equivalent to 30 per cent of four-year university/college students in the Republic of Korea. The average loan amount per student is around 2,000,000 won for all programmes. Nominal interest rates for the six listed programmes vary from 0 per cent to 5.75 per cent; the typical repayment period is 4 years. Overall, student loans in the Republic of Korea are highly subsidized and have not been used as a tool to support cost recovery in higher education. 24

26 The five case studies 2.5 The Philippines Student loans schemes in the Philippines have a relatively long history: The Study Now, Pay Later (SNPL) scheme was set up in Restricted to poor students enrolled in public universities, the scheme has never operated on a large scale and has exerted only a marginal influence on higher education financing; its record of performance has been low. The SNPL has operated in two phases. In the first phase ( ), government financing institutions (GFIs) including the Social Security System and various government banks were required to provide the initial loan capital and were charged with the task of operating the loans scheme, including the lending and repayment mechanisms. The GFIs displayed active resistance to the scheme: over the period from 1976 to 1986, they disbursed only 40 per cent of assigned loan funds and, given government default guarantees, collected only about 40 per cent of due loan repayments. After the disengagement of the GFIs in 1989, the scheme has been administered by the Office of Student Services, within the Commission on Higher Education (CHED). However, these new bureaucratic arrangements both lacked administrative capacity and incentives to operate a viable loans scheme. Stringent budgets continue to restrict coverage to a few thousand new borrowers each year and loans are often insufficiently large to cover tuition fees. With a disinclination to collect loan repayments and negative borrower attitudes towards repayment, the repayment rate has now dropped to a mere 2 per cent. Two new government schemes have emerged recently, focused on a specific (economically deprived) region and on particular institutions the university Centres of Excellence (COE). While both schemes are government funded (via CHED), the educational institutions concerned are responsible for the direct administration of the scheme, including disbursement and, notably, loan repayment. Some institutions have declined to participate in the COE scheme. Student loans have never operated on a large scale in the Philippines; their impact on higher education finance has been minimal and their performance record poor. Current experimentation with governmentfunded but university-based loans schemes is also operated on a small 25

27 Policy options for student loans schemes: lessons from five Asian case studies scale with questionable success. No clear plans are afoot to develop any nationally based scheme of broad coverage and sizeable impact in the foreseeable future. 2.6 Thailand The Thai loans scheme, which began operating in 1996, is aimed at disadvantaged students, enrolled in upper secondary general and vocational schooling as well as tertiary education, in both the public and the private sector. The coverage of the scheme is extensive, reaching about a quarter of the students in upper secondary, a third of university students (excluding the two open universities) and up to a half of all students enrolled in Rajabhat (teacher training) institutes. The scheme is run through the national Student Loan Scheme Committee (and its loans office), which receives annual subventions from the national budget. Borrower selection is made by individual educational institutions (schools, colleges and universities), which receive loan budgets through a system of top-down budget allocation, from the central loans committee, via the Ministries of Education and University Affairs (now divisions in a combined Ministry of Education). Individual educational institutions have considerable autonomy in the lending process, including decisions on the size of individual loans (up to a designated maximum) and on the purpose of a loan (tuition fees, accommodation and other living expenses); this highly decentralized method of loan distribution leads to considerable inequities across the educational system. While the scheme is aimed at the needy student, targeting is not effective. The family income ceiling set for loan eligibility is three times the income officially designated as defining poverty. Loan budget allocation to educational institutions is only very loosely tied to the social profile of the student population at a given institution (in the case of universities, allocation criteria are not based at all on student poverty within the university or related to need). The rapid growth of the scheme, considerably in excess of plans, has led to budgetary cutbacks in the system for new borrowers. This is reflected by the falling average loan size overtime (even in nominal terms) rather than by the number of new borrowers (which has continued to rise at tertiary level). Institutions have evidently preferred to spread declining 26

28 The five case studies loan budgets over a broader student population, again blunting the effect of the scheme in assisting the most needy students. The Thai loans scheme receives a considerably higher level of government subsidy than the loans schemes in the other case study countries; with a one per cent rate of interest and repayment in nominal terms, students are in practice required to repay only a small fraction of the value of the original loan. 2.7 Dominance of mortgage-type schemes From the foregoing summaries, it is evident that there are considerable differences across the various case study schemes, in terms of such parameters as schemes organizational structure, student coverage, loans schemes objectives, funding sources, loan allocation procedures and collection methods. 6 An analysis of the salient differences between loans schemes and how these differences impact upon loans scheme performance are central concerns of the present study. However, all the schemes examined in the case studies have one common element: their underlying loan arrangements are, as in the case of virtually all student loans schemes in developing countries those of a traditional mortgagetype loan. The central features of mortgage loans are presented in this section, as a background to the comparative discussion in the chapters that follow. In the conventional mortgage-type student loan, repayment is made over a specified time period in fixed, usually monthly payments. A designated rate of interest on the loan and a maximum loan repayment period are employed to calculate the fixed periodic payments. The higher the rate of interest that is set and the shorter the repayment period, the greater the monthly sum required as repayment will be. One advantage of mortgage-type loans, from the perspective of the body charged with loan repayment collection, is the ease in ascertaining the monthly repayment obligations of the individual borrower, which are time-invariant. However a regime of fixed-level repayments may impose a heavy burden on new graduates in the initial years following graduation, given low starting salaries of new graduates and the reality of graduate 6. Additional comparative information on the case study loans schemes is summarized in Table A

29 Policy options for student loans schemes: lessons from five Asian case studies unemployment in many developing countries. A heavy repayment burden, it is often claimed, will lead to repayment default. Yet, in practice, a number of measures may be employed, within mortgage loan repayment procedures, to obviate the occurrence of heavy repayment burdens; some of these are standard practice, others could be easily adopted. These measures include, for all borrowers, the delay of repayment obligations for a period of grace following graduation and the introduction an extended repayment deadline. The introduction of a lower interest rate charge (acting as a general loan subsidy) would also lighten the burden of monthly repayments, but this would lead to a shortfall in total repayments. 7 Finally, repayment deferral may be made available to borrowers on an individual basis, in cases of financial hardship: to the unemployed and to low-income workers (whose income falls below a designated low income ceiling). 7. Financial issues are discussed in detail in Chapter 8. 28

30 Chapter 3 Why student loans schemes? 3.1 Alternative loans scheme objectives National student loans schemes may be established for diverse reasons. We may identify five different sets of objectives for student loans schemes, which in turn will influence the design and operation of the scheme as a whole, as well as its financial sustainability (this topic is discussed in greater detail in Ziderman, 2002). These are: 1) budgetary objectives (income generation), 2) facilitating the expansion of higher education, 3) social objectives (improving equity and access for the poor), 4) meeting specific manpower needs, and 5) easing student financial burdens. In practice, any given scheme may incorporate more than one objective. Budgetary objectives (income generation) Public universities throughout the world, and particularly in developing countries, are under-financed. Leaving aside situations where the university system is expanding (we deal with this subsequently), constrained government budgets may lead to a general under-funding of public universities. This situation may arise for a number of reasons; three of which are discussed here (Table 3.1). First, additional government funding may not be available to enable universities to maintain enrolment levels and quality in the face of rising unit costs. Second, across-the-board cuts in overall government expenditures, including higher education, will pressure the public university sector to seek alternative funding. Third, many countries have adopted policies that favour basic, over tertiary, education, leading to a reallocation of funding away from the universities to other sectors of the education system that display higher social rates of return. In all these cases, budgetary parsimony has resulted in public universities turning to greater cost recovery, in an effort to tap alternative sources of funding. The main thrust of these policies is to be seen in the 29

31 Policy options for student loans schemes: lessons from five Asian case studies introduction, or increase, of student payments for services received. These may take the form of higher, more realistic tuition fees or increased payments for subsidized lodgings and meals. Recourse to the banking system for a regular loan to ease this payment burden may be unavailable; banks are notoriously loath to lend for educational courses a clear case of market failure. Hence there is a role for a government-backed student loans scheme, offered at commercial rates, to fill this gap. This would mean that students are able to finance their education and living expenses through borrowing; the repayment burden is eased by the expected enhancement of earnings that the additional education makes possible. Table 3.1 Alternative objectives of student loans schemes Loans scheme objectives 1. Budgetary objectives (income generation from tuition fees) Generate income to maintain university enrolments and output or quality, in response to rising public university unit costs (additional government funding not available). Funding replacement: in response to reduction in overall government expenditures, including the education sector. Funding replacement: in response to reallocation of public educational budgets, from universities to other sub-sectors with higher societal returns. 2. University system expansion Generate additional tuition fee revenues to (partially) finance expansion of the public university sector. University expansion via growth of the private university sector (to minimize the state s role in financing expansion. 3. Social objectives (equity and access for the poor) Loans targeted towards needy students. Cross-subsidization: grants for needy students financed by income from higher fees. 4. Manpower needs Meet specific occupational or regional manpower needs. 5. Student assistance Ease student financial difficulties during study. Increase student commitment. Improve students financial independence. Loans schemes primarily concerned with cost recovery are also frequently subsidized and targeted on the poor. But these elements are 30

32 Why student loans schemes? not an integral part of a cost recovery loans scheme, which, in principle, should be offered at market interest rates and available to all, not only the poor. The availability of additional revenues from student fees, facilitated by the introduction of a loans scheme, may not lead to increases in net funding to the education institutions. Whether it does so or not will depend on whether additional revenues from fees are offset by commensurate reductions in public funding of the institutions. Facilitating higher education expansion Governments have responded to the growing social demand for higher education through policies leading to expanded student enrolments; yet, due to national budgetary constraints, the growth in student numbers is largely unmatched by commensurate additional government funding. Responding to the pressures of growing social demand for education expansion will require sizeable increases in public expenditure. These increases could be contained by offsetting additional revenues from increases in student fees, perhaps matched by reduced public institutional support. A complementary measure is to encourage the growth of private educational institutions. Students pay full costs at private universities, with a minimal burden on the public purse. However, full-cost fees are likely to be sizeable and beyond the reach of large segments of the population. A student loans scheme may have a central role to play in easing the burden of private fees, particularly if private education is to be widely available and not to remain the purview of the rich. Social objectives (increasing access for the poor) None of the above reasons for introducing a student loans scheme constitute a case for subsidized student loans. The widely held objective of increasing the educational participation of the poor does. In many countries the relatively low enrolment of poor and disadvantaged youth in non-compulsory education is a cause of social concern; increasing the access to schooling among these segments of the population has become a major element in educational and social policy. There is a broad consensus that clear financial incentives need to be offered, not only to overcome the burden of fee payments and living expenses but also to offset both 31

33 Policy options for student loans schemes: lessons from five Asian case studies parental resistance to reductions in family income and the risk that the benefits of the educational process may not be sizeable. The traditional, and most effective, method of enhancing the educational access of the poor has been through the provision of meanstested grants (scholarships) to cover tuition fees (where schooling is not free) and usually living expenses as well. This remains the dominant approach for secondary education, although there are exceptions in some countries; we have noted for example that Thailand provides student loans for upper-secondary students. However, a widespread scholarship scheme is likely to be expensive; the use of loans rather than grants offers a method that both increases access for the poor and reduces, or at least contains, public expenditure over the longer term, as loan repayments build up. To be effective in increasing the education access of the poor, loans need to be offered with attractive conditions. Hence the justification for subsidized loans, in terms of grace periods for repayment, belowmarket rates of interest and repayments not fully linked to inflation. Loans schemes meant to assist the poor should be designed so as to reach this population, otherwise the central objective of the scheme will be lost. A less direct role for student loans under this objective is the provision of grants for needy students, financed by income generated from (higher) tuition fees paid by more affluent students, for whom non-subsidized loans are available (i.e. at market or near-market interest rates). Manpower needs Loans schemes may aim specifically at providing support for students who are willing to study in fields of national manpower priority (e.g. engineering) or to work in areas of social importance (doctors or teachers servicing remote rural areas). Loans schemes may either be developed specially for these groups (such as medical students) or advantageous repayment conditions may be offered within the context of a general, non-subsidized loan programme. Easing student financial burdens The final group of objectives is more typical of loans schemes in developed countries. Even when tuition fees are minimal, students (both the more affluent and the disadvantaged) may face considerable financial 32

34 Why student loans schemes? burdens. Potential earnings are foregone while studying, and living expenses may be considerable, especially when the student does not attend a university close to home. Financial pressures, which may have negative effects on a student s academic performance (thus compromising the process of effective human capital investment), can be mitigated by the broad availability of student loans. While such burdens may fall relatively heavily on the poor, in principle loans for this purpose could be made available to all students, including more affluent as well as poorer students, as long as these loans are not subsidized. There are two additional arguments under this category of objectives, which are often voiced: increasing student commitment and offering university-level students financial independence. Students, particularly from more affluent backgrounds, who benefit from overly subsidized university education, may fail to develop a sufficiently mature approach or commitment to studies without the discipline imposed by payment of realistic university fees; loans schemes make possible the imposition, or augmentation, of tuition fees. Finally, it is argued that students who have reached adulthood, should not be forced to rely upon parental financial support, which might not be forthcoming even in the wealthier families. Multiple objectives Some schemes may be aimed at more than one objective. Often multiple objectives can be accommodated, without compromising any particular objective; for example, loans available to all students to facilitate fee increases and cost sharing, may also offer greater student independence. A loans scheme aimed at greater cost sharing between the government and students may be constrained by insufficient loan budgets and some applicants will be denied a loan. Loans might be made available on a first-come, first-served basis, but it may be preferable to ration loans objectively, using parental income as a screen for selection, in order to give priority to poor students. The importance of defining objectives A clear distinction can be drawn between objectives 1 and 2, and between the group of objectives 3, 4 and 5. The first group of objectives is concerned with generating funding for the university sector, in the case of tight government budgets and ensuing increase in the social demand 33