6.1. General information about student loan packages

Transcription

1 6. Mismatch between supply and demand for loans in Italy This chapter compares students desired characteristics of a loan and what is available on the Italian student loan market. Results presented in the previous chapters show that both in the high school and university samples approximately 40% of the students intend to take a student loan, if it matched their needs. In spite of what stated intentions show, the actual take-up rate is less than 1% of the total student population. Using the information gathered through the qualitative survey about the amount of loans issued by the interviewed banks, we estimated that the amount of student loans awarded between 2003 and 2008 is about 50 million corresponding to an approximate average of 2,000 loans per year. Fig. 6.1 shows that the loan take up ratio in Italy of less than 1% is the lowest compared to selected OECD countries such as the Netherlands (30%), the United States (55%) or Australia (80%). This section investigates whether this weak demand is not expressed due to a supply mismatch. We place special emphasis on the quality of the loan package in the sense that the product currently offered might not be tailored to students needs. The chapter first explains general information about student loan packages and then describes students stated preferences towards loans. Suggestions to improve the quality of the package conclude the chapter General information about student loan packages This part provides background information about student loan services by a) introducing useful definitions of the characteristics of student loan schemes, b) describing the situation of the actual student loan supply-side in Italy, c) discussing issues related to the recovery and management of student loans and d) comparing Italian student loans with the established international experience Characteristics of a student loan package Eligibility. Eligibility can be determined on the basis of the students merit and/or needs. A system is meritbased if loans are issued conditional on the achievement of a certified university performance. Merit is evaluated in terms of number of credits obtained with a regular academic progress. In the Italian case this condition protects banks against the risk of dropout, which is particularly high for the first and second years of university courses, but precludes the possibility that a loan can act as a means to equalize access to higher education. In a need-based system, loans are available to those students who do not reach a threshold level of income. Access to financial aid can be means-tested either on an individual or family basis (Oliveira-Martins et al. 2009). In individual-based systems the student is considered to be financially independent from the parents. Funding is available independently from family income through universal grants or loans. On the other hand, family based systems consider students as being members of their families. Italy adopts the family-based system. Household income is means-tested using the index of the household socio-economic situation (Indicatore della Situazione Economica Equivalente, ISEE) based on equivalent incomes corresponding to the ratio between an estimate of family wealth and a household equivalence scale, which accounts for differences in family composition. In Italy, access to student loans is universal. Undergraduates economic means are not tested. Eligibility for a loan does not require a collateral. Interest rates. Usher (2005) mentions four main types of interest rate systems: - no nominal interest rate: the loan does not grow in nominal terms during the study period, therefore it corresponds to a subsidized interest rate; - no real interest rate: the borrowed amount grows with inflation to preserve the real value, but no real interest rate is charged. The implicit subsidy is less than that of the zero-nominal interest rate; - cost of government borrowing: in the case the system charges an interest rate related to the effective cost of government borrowing; 51

2 - market interest rate: when the system requires to pay market interest rates. A well-functioning loan system charges an interest rate related to the government s cost of borrowing (Barr 2009). Italian interest rates on student loans are not subsidized and are calculated by adding a spread above the fixed (Interest Rate Swap, IRS) or floating (Euribor) base interest rate. Italian students pay an interest rate close to the market rate, but higher than the cost of government borrowing. Some banks may offer interests contributions during studies depending on the ISEE. Repayment system. Depending on repayment conditions, a student loan scheme can be classified as: - income-contingent: the payback period is conditional on the amounts that the borrower earns after graduation. Instalments can be calculated as a flat rate on earnings or may be progressive. The charge of higher rates at higher levels of income is said to end-load the repayment burden at later stages of the life-cycle (Chapman 2006); - mortgage-style: the loan is paid back in a pre-determined number of instalments, after the completion of studies and a period of grace when repayments are not required but interests mature, usually in fixed monthly amounts depending on the interest rate and the length of the amortization period. The mortgage system is front-loaded and students might experience hardship in the first part of the repayment period. In practice, the mortgage style can include some income contingent mechanism. Loan forgiveness. Debt may be written off, initially temporarily, if borrowers earnings fall below an income threshold. Debt is cancelled if the borrower becomes permanently disabled or dies. In some cases, any debt left after a certain number of years, usually not less than 15 years, may be forgiven Student loan programs in Italy The administration of student loan schemes. The Italian market for student loans presents a diversified supply of contract types that involve three parties: the student, the university and the bank. Alternatively, some schemes involve a fourth stakeholder, the Regional Institutions for the Rights to University Studies, when the program is promoted also through a regional administration. The contract features vary depending on the negotiated agreement between the university and the bank, which also establishes the share of loan to be covered by the two parties in case of missing loan repayments. Universities may take part of the risk and certify eligible students after tracking their merit requirements. After universities approval, banks disburse the loan opening a personal bank account for the student. So far the default rates have been negligible. However, given the intangibility of human capital investments both banks and universities might be challenged in providing loans without requiring a suitable collateral. To correct for this market imperfection, since the introduction of student loans in Italy in 1991, the government created an ad hoc guarantee fund for student loans. In 2007 the Ministry for Youth Policies instituted a fund with the scope of providing credit to young people (Fondo per il credito ai giovani) with an initial budget of 33 million Euros. The credit line, termed Diamogli Credito, as it will be explained below in greater detail, aims at helping students to afford the payment of university fees and living costs. Within the first year (01/03/ /12/2008) the Fund has released 905 guarantees, corresponding to loans amounting to 1,12 million Euros. The Law proposal issued by the Ministry of Education, University and Research on October 28, 2009 disciplines the creation of a Merit Fund (Fondo per il Merito) to be managed by Consap s.p.a., which is a government-owned company. The guarantee fund can be financed by public funds and private donations Student loans recovery and management Government sponsored student loans schemes are operational in more than seventy countries. Most loans schemes are subsidized, administrative costs are not charged to borrowers and students are not subject to repayment default. Lessons that we may learn from the present downturn in the economy suggest that deferments, delinquencies and defaults on student loans may boost amid weak job market for graduates and rising tuition. In the United States, where more than 70% of professional degree earners partially financed 52

3 their education through federal student loans, default rates are expected to reach 6.9% for fiscal year 2007 up from 4.6% two years earlier. High levels of default may be a threat to the viability of the system. Italian students have little information about student loans. Because the take up rate of loans is so low, inevitably students have modest experience about borrowing and managing the loan to cover their needs and have slight chances to learn from errors (Mangiatordi and Rinaldi 2008). Students with experience in carrying and managing debt, such as part-time students and students entering tertiary education with at least one-year delay, are more willing than others to take on additional debt to finance postsecondary education. As reported by Fornero et al. (2008) using the 2006 Bank of Italy income survey, Italian households have a low level of financial literacy. Financial alphabetization is especially low for the age groups with less than 30 years and more than 65 years. In critical situations, Italian students may not be aware of risk-copying strategies such as asking for forbearance or payments based on interests only or other viable exit options. Without the support of a central coordinating student loan agency, it may prove difficult to reach out students to make sure that current and prospective student borrowers are aware of the many flexible repayment options designed to assist them with their financial obligations. The Italian lending system has negligible information to predict repayment capability based, for example, on type of high school, universities drop-out rates, borrower s background, and, above all, achievements considering the strong association between high grades and low default risk. Italian banks also lack historical information about the repayment ratio, that is the amount of the original loan that a student is required to repay, and the recovery ratio, that is the amount that a lending institution expects to receive back in repayments as percentage of the total cost of a loan scheme. The law proposal issued on October 28, 2009 by the Ministry of Education, University and Research gives Consap s.p.a., the company which administers public insurance services on behalf of the Italian state, the mandate to manage the financial aid for university students verifying the fairness of the means-tested access and the national standard entry test to be used to identify the best students. For a successful implementation of the financial aid program it is important that Consap maintains dedicated web sites explaining, for example, how to use loans in a non fungible way or how an income-contingent scheme works, promotes an advertisement campaign at the national level and actively informing students about opportunities and risks associated with taking up a loan directly in the enrolment information package distributed by universities Main student loan programs Banca Intesa and Unicredit are the leading lending institutions managing student loans with the highest number of agreements with universities. The loan packages Intesa Bridge and Unicredit Ad Honorem, offered by Banca Intesa and Unicredit respectively, are here compared with Diamogli Credito, the program which is the result of an agreement between the Ministry of Youth Policies and the Italian Banking Association (ABI). The guarantee fund backing the project is endowed with 33 million Euros from the government. Banks joining the program provide the other half of the guarantee. The fund is supposed to cover a potential of 660 million loans anticipating a 10% rate of default. In Unicredit Ad Honorem, universities ensure between 3% and 9% of the amount of loans issued. The University guarantee is used only when losses from defaults are larger than 3% and less than 9% of loans issued. The Bank is accountable for all other losses. In the Intesa Bridge agreement, universities contribute in the 3-15% range. Differently from the non-governmental packages, Diamogli Credito a) is limited to lower maximum amounts, b) the interest rate is capped, c) is earmarked to specific expenditures, d) does not offer a grace period, e) it can be requested in the first academic year by those who obtained 80% of the maximum possible score of the high school final exam, f) in subsequent academic years, merit is evaluated both on academic credits obtained in the previous years with a pass on 2/3 of the exams and on grade averages that should not be lower than 24/30; Intesa Bridge and Unicredit Ad Honorem are disbursed on a merit basis requiring only that students have earned at least 120 credits in the first two years. All programs do not require a collateral neither to students nor to parents. 53

4 The detailed features of Intesa Bridge, Unicredit Ad Honorem, and Diamogli Credito are presented in Table 6.1 and, in part, summarized below. Intesa Bridge. The initiative was launched in June 2003 as a pilot project financed by the European Investment Bank ( 25 million) and the participation of three technical universities: Politecnico di Milano, Torino, and Bari. In February 2004, Università Politecnica delle Marche also joined. Since then, Banca Intesa has agreed to extend the operation to several other higher education institutions in Italy. Currently, there are 53 universities, which have joined the programme, covering 35% of the student population. Eligibility is based on merit defined in terms of credits. If enrolled in the third year, then students must have earned at least 120 credits in the previous two years. Otherwise, it suffices to attend graduate courses such as the Laurea Magistralis, a Ph.D. program or other post-graduate programs. The interest rate is set referring to the 9 years IRS (Interest Rate Swap) with an additional spread of 1.5%. In 2009, the rate was 5.1%. During studies, rates can be subsidized on a means-test or merit basis depending on the agreements signed with each university. Unicredit Ad Honorem. This package has been introduced in the same period as Intesa Bridge and is implemented through agreements with the main Italian universities. Eligibility criteria are the same as Intesa Bridge. The interest rate is variable during studies and is fixed after studies are completed. If the rate is variable, the reference rate is Euribor at 3 months plus a spread of 1.3% giving an approximate value in 2009 of 3.8%. The fixed rate is formed referring to the 10 years IRS with an additional spread of 1.45%. In 2009, the applied rate was approximately 5.1%. During studies, rates can be subsidized on a means-test or merit basis depending on the agreements signed with each university. Diamogli Credito (Let s give them credit). This governmental program was instituted in March 2008 and is offered in collaboration with ABI through more than 50 private banks spread over the national territory, including Banca Intesa and Unicredit. The loan can be cumulated up to a maximum of 6,000. The repayment system does not contemplate a grace period. A distinctive feature is that it is earmarked to specific expenditures for a maximum permitted amount reported in parenthesis: - tuition fees ( 2,000); - rental contract for students who are not local residents ( 3,000); - expenditures connected with the Erasmus programme ( 6,000); - enrolment fees in post-graduates courses ( 6,000); - laptop ( 1,000). Students are eligible also in the first academic year by those who obtained 80% of the maximum possible score of the high school final exam. In subsequent academic years, merit is evaluated both on academic credits obtained in the previous years with a pass on 2/3 of the exams and on grade averages that should not be lower than 24/30. The interest rate is fixed at 5.8% by the Ministry of Economics and Finance for the whole funding period that cannot last more than 36 months. In general, market interest rates on student loans applied by the non-governmental programs in 2009 were approximately 5.1%. The rates are higher than the government cost of borrowing of 3.6% in 2009 based on the Rendistato index published by the Bank of Italy, which is the weighted average yield on a basket of government securities. According to the qualitative survey administered to the bank officials, the volumes of Diamogli Credito, mostly issued by Unicredit, is until mid 2009 about 1.3 million. Intesa Bridge and Unicredit Ad Honorem offered until mid 2009 a loan volume of about 42 million, 85% of which is contributed by Intesa Bridge. The other banks contributed a loan volume of about 8 million. 54

5 International comparison of student loan programmes Table 6.2 presents a comparison of the student loan packages offered in selected OECD countries including Italy. The international experience shows that loans can be awarded on the basis either of merit or needs. All selected countries use merit eligibility criteria. Italy, Australia, and the Netherlands offer universal access because do not test for income means. Need-based conditions restrict eligibility for Germany, Sweden, the United Kingdom and the United States. In Australia, Germany, Sweden, the Netherlands, United Kingdom, and partly United States and Italy subsidize interest rates during the study periods either offering no nominal interest rate or real interest rates. All selected countries do not differentiate between interest rates charged during and after studies. Germany is an example of highly subsidized interests because a nominal interest rate is not charged on loans. Compared to other countries such as Sweden or the Netherlands, where the rate is linked to the government cost of borrowing, the average Italian market interest rate is relatively high. Countries are quite different in terms of repayment conditions. Repayment is mortgage style for Germany, the Netherlands, and Italy. Australia and United Kingdom offer income-contingent schemes. Sweden and the United States provide both options. When the repayment scheme is contingent upon income, the repayment starts when the borrower s income exceeds a predetermined threshold. The repayment period also varies as the rate depends on the income level. Loan repayment is written-off after 20 years in Germany, 15 years in the Netherlands, 25 years in the United States or, for all selected countries, in case of death or permanent disability Student loans in Italy through survey results This part describes desired characteristics for a loan stated by high school and university students in the respective surveys. The estimation of direct costs of university studies permits evaluating whether available loans cover costs. The comparison between desired and actual characteristics of a loan permits informing lending institutions about possible quality improvements of the loan package. We ask students to rank each characteristics as first, second and third preference. For reasons of conciseness, we describe the most preferred preference only, but report all of them Purpose and use of loans for university students Purpose of student loans. Table 6.3 shows that 52.8% of high school students and 57.9% of university students state that their most preferred preference is using a loan to gain economic independence from their parents. The second most preferred preference for high school students is to leave the part-time job or work less (21.1%), while for university students is to use the money to complement family funding or other sources such as scholarships (21.7%). Interestingly, 60% of the 27.9% of students benefiting from a scholarship would integrate the grant with a loan. Students are not interested in using the money to move to prestigious universities or university far away from home. Main intended uses of a student loan. Inspection of Table 6.4 reveals that students both high school and university students would use the loan to cover tuition fees 41.8% and 45% respectively). The second most preferred preference is accommodation expenses (21.9% and 20.9%). Meals expenditures follow in terms of relative importance to high school students, while university students would invest the loan on a study experience abroad joining the Erasmus program. Availability of information about financial aid to high school leavers. Financial aid for students in Italy is mainly channelled through scholarships that, as shown in Table 6.5, are known by 93.5% of all high school 55

6 leavers. In contrast, only 35.6% of the high school leavers know about the existence of a student loan program and almost nobody knew about the Diamogli credito initiative. Interestingly, among those who are informed about student loans, almost 50% are willing to take up the loan, which is slightly higher than the 40% sample average. Only about 43% of students are aware of tax exemptions. High school leavers are also not aware of the possibility to find part-time job opportunities in collaborations for 150 hours in the university administration The packaging of a good student loan This section describes how students would package a loan in terms of the characteristics that best suits their needs and preferences as reported in Table 6.6. Eligibility. High school students reveal that their most preferred preference (36.7%) is the opportunity to obtain a loan in the first year. For university students the possibility to take up a loan in the first year is the second most preferred preference (25.6%). Repayment system. The question asking about the preference towards the repayments in instalments proportional to the income level, that is for an income contingent repayment scheme, has been stated as the third most preferred by high school leavers and as the fourth one by university students. Lower than market interest rate. The interest here is to know whether students think that market rates are unfair. Lower than market rates can be achieved through subsidized interest rates in the form of no nominal or real interest rates or by promoting competition between private supply of loans and public loans, such as Diamogli credito, if offered at a rate close to the cost of government borrowing. This feature is the second most preferred by 20.5% of high school students, and by the third most preferred by19.4% of university students. Loan conversion into scholarship for best students. This characteristic is the most preferred among university students (29.9%) and is the fourth most preferred (14.4%) by high school leavers. This option could provide correct incentives to increase the study effort and to strike for excellence. Flexibility for loan payback (loan forbearance). This characteristic asks for a less rigid payback regime, which may expressly allow for forbearance and deterrence. This feature is one of the best second preferences in both samples. A flexibility improvement can be effective in reducing aversion to loans. Payback through the tax system. This characteristic is the least preferred, and probably the least understood especially, because it refers to the possibility to pay back a loan through a tax charge target on graduates incomes that would have the effect of correcting the regressive nature of scholarships financed by general tax revenue. Minimum demanded loan amount by students and households. Table 6.7 reports the minimum amounts demanded for a loan by students and households. Students concentrate mainly in the 2,500 and 5,000 category, while households desire more for their children and are positioned in the 5,000 and 7,500 levels. The average amount demanded by high school leavers is 6,449 and by university students is 5,578. Households of the Veneto region demand an average loan amount of 6,600. Living costs in tertiary education: coherence with available and demanded amount of loan. Table 6.8 reports the stated direct costs of studying formed by living expenditures and tuition fees. Living costs include food, beverages, clothing, accommodation, books, transportation and mobile phone. Tuition fees are separately asked. The average cost of living is 346. The cost of living for a university student in the North and Centre of Italy is about 15% higher than in the South, where tuition fees are also lower by almost 50% (Fig.6.2). Students living outside the university town (30% of the sample) face costs that are almost 38% higher than the costs borne by a student living in the university town (39% of the sample). Commuting students, who are 31% of the sampled students, state the lowest costs. The three categories of students pay comparable tuition fees (Fig.6.3). Table 6.9 describes the annual cost of living expenditures by income quintiles. The fact that the consumption basket of students is made mainly by necessary expenditures can be deduced by the fact that the level of living expenditures for the rich student is only 10% higher than the level 56

7 of expenditure of the poor student. The average amount of tuition fees is 1,067. It is substantially lower in the less affluent quintiles due both to the effect of tuition exemptions and the fact that the level of the fees is lower in the South as shown in Table 6.8. Tuition fees represent 15.9% percent of total direct costs in the lowest quintile and increases to 23.8% in the upper. The cost of living of a university student is comparable to the cost of living based on maintenance expenditures estimated by Menon and Perali (2010) for a child living with the parents of age between years old. For an Italian family, entering tertiary education implies mainly the extra-cost of tuition fees. Most Italian households, considering also that the average number of children per family is less than two, can infact afford to fund the investment in higher education of all their children. Interestingly, the annual amount of loan demanded by students and households is covered by the annual amount of loans supplied by the main student loans programs and is congruent with the annual living costs of 4,152 borne by the university students. Comparison between the actual and desired student loan packages in Italy. The synoptic table (Table 6.10) summarizes the characteristics packaging the loan product actually offered with the characteristics desired by the students. Judging by the ranking of both student types, students rank high the possibility to be eligible for a loan in the first year, followed by the opportunity of enjoying lower than market rates. The option of converting loans into scholarship for the brightest students ranks third and the income contingent repayment scheme is the fourth most desired option. This is the order of presentation in the table. Students care very much about having the possibility to enter the loan market also in the first year. The reform proposal of the Italian university system (MIUR Law Proposal October 28, 2009) intends to run standardized national tests that may prove to be very useful to determine a merit score based on an equal treatment of students coming from different backgrounds. This characteristic is of special importance. The fact that at present private loans are offered only to third year students with a merit record of at least 120 credits entails that private loans cannot be used as a means to equalize access to tertiary education. Students might be fear that market rates are unfair. Lower than market rates can be achieved through the adoption of no nominal or real interest rates or inducing competition between the private and public loan product to move market rates closer to the cost of government borrowing. Students would also prefer to pay back the loan in amounts that are proportional to their income level in order to repay more, later in the life cycle. The option to convert a loan in a scholarship is also of interest to students with the hope that it may generate a virtuous competition. Flexibility of the pay back plan allowing for forbearance may make loans more palatable also to loan averse students. Information about loan availability should be better conveyed both to high school students and to university students. A characteristic that is not in contrast with students expectations is the amount of loan actually available Conclusions To inform providers of loans about the possibility to improve the quality of the offered loan package by matching students needs, we asked students to declare the preferred characteristics of their desired package and compare them with the actual features of a loan. On the supply side, according to students stated preferences the quality of the package can be improved incorporating the following desired characteristics: providing the possibility to obtain a loan in the first academic year; repayment amounts should be proportional to income; loan conversion into scholarship on a merit-basis. Access to loans in the first year will be implemented through a national standardized test as established in the Law Proposal issued on October 28, 2009 by the Ministry of Education, University and Research. Differently from grants, entitlements to loans should not be means tested, though linked to a reliable measure of student performance. Income contingent loans, which are not contemplated in the actual offer, should be 57

8 introduced also to capture the relatively higher demand for loans of low-income students. The possibility to convert loans into scholarships answer the students aspiration to compete for funding on a merit basis and provides correct incentives favouring a virtuous student s behaviour. This characteristic also represents an interesting option to be considered in the transition from a scholarship-based system to a mixed scholarship/loan system. The average annual amount requested is about 6,400 Euros for high school students and about 5,600 Euros for university students. Given our estimates, this stated amount is sufficient to cover both tuition fees and living costs. Because of the low mobility, the cost of living of an Italian student is comparable to the cost of a high school student living with the family of origin. Interest rates of Italian loans are relatively high compared to the government cost of borrowing. On the demand side, the demand for loans will not boost in the foreseeable future if tuition fees will not increase independently of the quality of the package. In the short run, if offered loans matched students desired characteristics, it would be plausible to capture the demand of part-time students and students who entered tertiary education after an initial work experience. Broadening access by offering loans also in the first academic year may be effective in attracting the potential demand of those students who are willing to take a loan to leave the parental nest. Another non-negligible aspect relates to the actions to be undertaken to make a loan attractive to those loan averse students, who are about 38%. The government and the lending system should embrace in a joint effort to make loan information directly available to students investing both in a nationwide advertisement campaign and in delivering the information directly in the enrolment package without neglecting the importance of improving the financial literacy of young people. A positive indirect effect on loan averse students may also derive from policies aiming at reducing job market insecurity. 58

9 Table 6.1: Examples of Student Loan Programs in Italy Eligibility Characteristics Intesa Bridge Unicredit Ad Honorem Diamogli Credito Merit Academic selectivity Need Means-tested or Universal From the 3 rd academic year and have learned at least 120 credits; students attending graduate courses; students enrolled in a Ph.D. program; students enrolled in master (post graduate) programmes From the 3 rd academic year and have learned at least 120 credits; students attending graduate courses; students enrolled in a Ph.D. program; students enrolled in master (post graduate) programmes Universal Universal Universal From the 1 st academic year by those who obtained 80% of the maximum possible score in the high school final exam; for subsequent years merit is evaluated both on academic credits obtained in the previous years with a pass on 2/3 of the exams and on grade averages that should not be lower than 24/30; for post graduate programs the graduation grade must be at least 90% of the maximum grade Subsidy through reduced interest rate a Interest rate during studies Interest rate after studies IRS 9 years + spread 1.5%= 5.1% IRS 9 years + spread 1.5%= 5.1% variable: Euribor 3 months + spread 1.30%= 3.8% Max 5.8% (government limit) fixed: IRS 10 years + spread 1.45%= 5.1% Max 5.8% (government limit) University fees (Max 2,000) University accommodation (Max 3,000) Amount Yearly amount Max 10,000 with payments by semesters Max 10,000 with payments by semesters Erasmus program expenditure (Max 6,000) Post-graduate course fees (Max 6,000) Laptop (Max 1,000) Overall amount Max 30,000 Max 25,000 Max 6,000 Repayment scheme Mortgage style Mortgage style Mortgage style Grace period 1 year 2 years No grace period Repayment period Max 8 years Max 10 years Max 3 years Repayment Max period Max 12 years (3 for loan issue, 1 for grace period, 8 for repayment) Max 15 years (3 for loan issue, 2 for grace period, 10 for repayment) Max 3 years Loan forgiveness Death or disability Death or disability Death or disability Guarantee No guarantee neither to students nor to parents No guarantee neither to students nor to parents No guarantee neither to students nor to parents Default The university ensures between 3% and 15% of the amount of loans issued. The University guarantee is used only when losses from defaults are larger than 3% and less than 15% of loans issued. The Bank is accountable for all other losses Notes: a IRS= Interest Rate Swap; Euribor= European Interbank Offered Rate The university ensures between 3% and 9% of the amount of loans issued. The University guarantee is used only when losses from defaults are larger than 3% and less than 9% of loans issued. The Bank is accountable for all other losses The Guarantee Fund covers 50% of the debt to the bank 59

10 Table 6.2: International Comparison of Student Loan Programs for Selected OECD Countries Characteristics Australia Germany Sweden Netherlands United Kingdom United States Italy a Eligibility Merit Academic Selectivity Need Means-tested or Universal Satisfactory academic progress in form of credits Universal Satisfactory academic progress in form of credits. After the first two years, a minimum grade level has to be met and proof of participation is required Means-tested on parental income, students own savings and on the number of children in the family Satisfactory academic progress in form of credits Means-tested on student s own income. Satisfactory academic progress in form of credits Universal Satisfactory academic progress in form of credits Tuition fee loan is not means-tested but maintenance loan has a part, which is meanstested on parents income All students enrolled at least half time at eligible postsecondary education institutions Federal Perkins Loans and Subsidized Stafford Loans: Meanstested. Unsubsidized Stafford Loans: Universal Students enrolled third year with 120 academic credits Universal Subsidy through reduced interest rate Interest rate during studies Interest rate after studies No real interest rate (interest=inflation) 2.8% No real interest rate (interest=inflation) 2.8% No nominal interest rate No nominal interest rate Government subsidizes 30% of the cost of borrowing 2.8% Government subsidizes 30% of the cost of borrowing 2.8% Government cost of borrowing 3.05% Government cost of borrowing 3.05% No real interest rate (interest=inflation) 2.4% b No real interest rate (interest=inflation) 2.4% b Market interest rate for unsubsidized loans: 6.8% No nominal interest rate for subsidized loans Market interest rate 5% - 6.8% Market interest rate 5-6% means-tested or merit subsidies depending on university agreements Market interest rate 5-6% Repayment Income contingent Mortgage style scheme c Mortgage style based on modified annuity or income contingent Mortgage style Income contingent Mortgage style or income contingent Mortgage style Grace period No pre-fixed grace period. Repayment starts when taxable income of the borrower exceeds a yearly income threshold (A$ 43,151) 5 years from the scheduled degree completion date 6 months after receiving any form of financial support 2 years Starts in the April following completion of the degree if the student earns above a threshold GBP 15,000 in months 1-2 years Repayment Repayment period Varies as the repayment rate depends on the income level 20 years Repayment is scheduled to be finalized in 25 years or until the borrower reaches the age of years Continues until the repayment is completed. 10 years 5-10 years Loan forgiveness Yes, debt is writtenoff if borrower s lifetime earnings are not high enough Yes, any remaining debt is written off after 20 years Yes, although there is no income threshold at which loans are not repaid Yes, any remaining debt is written off after 15 years Yes, debt is written off if the borrower left the academic course 25 years ago or becomes permanently disabled or dies Death/disability/ after 25 years of repayments Death/disability Sources: Education at a glance (2009) Table B5.3, OECD; Student Loans at a glance (2009), European Investment Bank; International Comparative Higher Education Finance and Accessibility Website, < Notes: a. Displayed information refers to non-governmental Italian student loan packages, excluding Diamogli Credito. b. The legislation requires that interest rate for income contingent loans should not exceed the one percentage point above the highest base rate of a specified group of major banks. 60

11 Table 6.3: Purpose of a Student Loan High School University What will you do if you obtain this student loan? % % Preferences 1st 2nd 1st 2nd Leave the part-time job or work less Gain economic independence from parents Use this money to complement family funding or scholarships Move to prestigious university or far from home Other Table 6.4: Main Intended Use of a Loan Use of a student loan High School University % % Preferences 1st 2nd 3rd 1st 2nd 3rd Meals expenses Accommodation expenses Transportation costs Enrolment fees Studying abroad (Erasmus) Books Computer Other Table 6.5: Level of Information about Financial Aid Available to High School Leavers Which of the following type of financial aid do you know? High School Scholarship Scholarship for accommodation Student loan Diamogli Credito Tuition fees exemptions Part-time job collaborations for 150 hours in the university administration None Table 6.6: The Packaging of a Good Loan Loan scheme characteristics High School Yes % University % % Preferences 1st 2nd 3rd 1st 2nd 3rd To obtain a loan from the first year Instalments proportional to the income level Lower than market interest rate Loan conversion into scholarship for best students Flexibility for loan payback (loan forbearance) Payback through tax system Other No 61

12 Table 6.7: Minimum Loan Amount High School University Households Minimum level of loan amount (in Euros) % % % More than Average 6,449 5,578 6,605 Table 6.8: Monthly Direct Costs of Tertiary Education Direct costs categories Geographical area Expenditure Tuition fees Total North Centre South and islands Student status Expenditure Tuition fees Total Students living in the university town Students living outside the university town Students commuting Table 6.9: Annual Direct Costs of Tertiary Education by Income Quintiles Income Quintiles Direct costs I II III IV V Total Average annual expenditure (Euros) Average annual tuition fees (Euros) Incidence of fees over direct costs (%) Table 6.10: Synoptic Table Type of scheme Actual Desired Eligibility For non-governmental loan programs: from the 3 rd year For non-governmental loan programs: from the 1 st year Interest rate Market Lower than market rate Repayment system Mortgage style Income contingent Possibility to convert a loan into scholarship for best students No Yes Loan forbearance Rigid Flexible Available information Low High Amount Max 10,000 Minimum desired amount around 6,000 62

13 Figure 6.1: International Comparison of Student Loans Take-up Rates a for Selected OECD Countries Australia 80% Sweden 75% New Zealand 66% United States 55% Netherlands 30% Japan 28% Hungary 23% Italy <1% Sources: Education at a glance (2009) Table B5.3, OECD, academic year 2006/2007; Italy: based on authors calculations (academic year 2008/2009). Notes: a- The take-up rate is calculated as the proportion of students who have a loan over total student population. 63

14 Figure 6.2: Average Monthly Direct Cost of University Studies by Geographic Area (Euros) Expenditures Tuition fees North Centre South and Islands Figure 6.3: Average Monthly Direct Cost of University Studies by Student Status (Euros) Expenditures Tuition fees Students living in the university town Students living outside the university town Students commuting 64