10 th National Convention on Statistics (NCS) EDSA Shangri-La Hotel October 1-2, 2007

Transcription

1 0 h Naional Convenion on Saisics (NCS) EDSA Shangri-La Hoel Ocober -, 007 Financing Public Higher Educaion in he Philippines: An Examinaion of he Applicabiliy of Income Coningen Suden Loan Scheme by Rio Compra -Yonson For addiional informaion, please conac: Auhor s name : Rio Compra-Yonson Designaion : Sr. Economic Developmen Specialis Affiliaion : Naional Economic and Developmen Auhoriy Address : RDC Bldg., Capisrano-Echem Srees 9000 Cagayan de Oro Ciy Tel. no. : (0688) rioyonson@yahoo.com

2 Financing Public Higher Educaion in he Philippines: An Examinaion of he Applicabiliy of Income Coningen Suden Loan Scheme by Rio Compra Yonson ABSTRACT This sudy is a response o he suggesion ha he Philippines adop an income coningen suden loan scheme (ICSL), paricularly o address cos recovery and funding concerns in public higher educaion. Under his scheme, he governmen pays for he cos of educaion while he sudens are sill sudying. The governmen collecs repaymens only when sudens have lef he universiy and are earning incomes. The periodic repaymen is coningen on he borrower s income. The adopion of ICSL in counries such as Ausralia and New Zealand has faciliaed he successful shif from a sysem ha provides of a high level of subsidy o one ha provides a low level of subsidy, wihou apparen adverse effecs on higher educaion paricipaion. However, i is no clear how ICSL can work in he Philippines. Consequenly, his paper explores he applicabiliy of an ICSL scheme in he Philippine conex. A spreadshee simulaion model was buil based on he naure of loan repaymen under he scheme. The model incorporaes several key parameers affecing a borrower s abiliy o repay an ICSL deb. I will be seen ha wih plausible parameers reflecing he specific circumsances of he Philippines, an income coningen suden loan scheme would no be a major soluion o he cos recovery and funding concerns in public higher educaion. I. Inroducion In recen years, income coningen suden loans (ICSL) i have araced much ineres as an alernaive mechanism for cos recovery in higher educaion. In he Philippines, such a scheme has been suggesed o achieve cos recovery in he public provision of higher educaion and also o offse he adverse access effecs of fee increases, paricularly among he poor (ADB and WB, 999). For counries ha have adoped he scheme such as Ausralia and he New Zealand, here have been significan posiive resuls in erms of recovery of he cos of provision, wihou apparen adverse effecs on higher educaion paricipaion. In general, he inroducion of he scheme in each of hese counries has faciliaed he successful shif from he provision of a high level of public subsidy o a relaively lower level of subsidy o public higher educaion. Adminisraive-wise, a key facor o heir successful implemenaion of he scheme was he presence of an efficien axaion sysem which has been uilized for he collecion of ICSL loan repaymens.

3 Meanwhile, i is no clear how he scheme can work in he Philippines, given he specific circumsances and issues confroning he counry. Unlike in Ausralia and he New Zealand, here are several facors persising in he Philippines which negaively affec people s capaciy o earn and, among hose employed, opporuniy o earn higher incomes. Macroeconomic problems beseing he counry like low labour force paricipaion rae, high incidences of unemploymen and underemploymen and increasing brain drain direcly affec people s capaciy o pay an ICSL loan, or any loan for ha maer. Moreover, unlike he siuaion in Ausralia and in he New Zealand, he axaion deparmen of he Philippines has an unimpressive record as a collecion body. The Bureau is in much need of reform o correc is eviden lack of efficiency and effeciveness in collecing ax revenues, among ohers. Hence, i is deem no appropriae o use he counry s axaion sysem as he collecion mechanism for an ICSL scheme a his sage. Sill relaed o income axaion and which is likely o cause furher complicaion is he fac ha no all incomes of Filipinos are repored. A significan par of he populaion is in he informal secor and many have muliple sources of income where monioring of oal income for axaion purposes is nearly impossible. The cos would be oo high o warran he collecion of axes from his secor. Furhermore, he high incidence of ax evasion and avoidance also direcly affec he successful implemenaion of he scheme. Consequenly, his paper explores he applicabiliy of an ICSL scheme in he Philippine conex. Specifically, i assesses he financial performance of he scheme. I examines o wha exen he scheme can increase cos recovery and wheher or no he scheme is able o shif he greaer burden of he cos o he direc beneficiaries of higher educaion. To quanify he expeced recovery raes, a spreadshee simulaion model was buil based on he income coningen naure of loan repaymen under he scheme. The model incorporaes several of he key parameers affecing a borrower s abiliy o repay an income coningen deb in he Philippine conex. I will be seen ha wih plausible parameers reflecing he specific circumsances of he Philippines, an income coningen suden loan scheme would no be a major soluion o he cos recovery and funding concerns in public higher educaion. Under he base case, he expeced cos recovery rae is only 5.75% by he end of he cohor s repaymen period, which is 49 years afer he inroducion of he scheme. The main facors driving he low cos recovery rae is he dismal level of labour force paricipaion rae, paricularly of women

4 despie heir higher universiy paricipaion rae. Oher imporan deerminans are he highly skewed disribuion of workers oward he low income caegory, high higher educaion dropou rae and low income growh. This paper is organized as follows: Secion presens he basic ICSL model used in he sudy. Secion oulines he baseline figures and assumpions used in he simulaions. Secions 4 o 6 presen and analyse he simulaion resuls. Finally, Secion 7 provides a synhesis of he discussions and findings. II. Basic Income Coningen Loan Repaymen Model The basic idea of an ICSL sysem of educaion finance is ha he governmen pays for educaion coss during he ime ha he sudens are in he universiy. The governmen collecs loan repaymens only when sudens have lef he universiy and are earning incomes beyond a predeermined income level. The required amoun of repaymen is coningen on he borrower s income. Tha is, he fracion of income ha is colleced as repaymen for he suden deb incurred varies wih he borrower s curren income. The lengh of repaymen depends on he lengh of sudy, he oal amoun loaned, labour force saus, employmen saus, income, and oher facors which affec he abiliy of he borrower o repay heir debs, such as migraion and marriage, among ohers. The income coningen naure of he loan repaymen is illusraed in he following basic mahemaical model of an income coningen sysem of educaion finance: AR k, n = ( wk, n ), where wk, n α ET Equaion () AR 0 < ET Equaion () k, n =, where wk, n where AR k,n is he repaymen required from borrower n in year k, a is he repaymen rae ha corresponds o borrower n s level of income, w k,n is borrower n s earning in year k and ET is he earnings hreshold. The earnings hreshold deermines wheher or no he borrower has o make repaymens for his/ her suden loan. Repaymen commences when annual earnings exceeds he earnings hreshold. Oherwise, he borrower is exemped from making repaymens. Repaymens coninue unil deb is fully paid. Any amoun ousanding loan upon he age of reiremen is forgiven. A spreadshee simulaion model was buil based on he specificaions on he naure of he loan repaymen and on he assumpions made on relevan variables. A simulaion cohor was consruced o model he workings of he scheme. The simulaion process is described in deail in Appendix A. The generaed socio-economic, educaion, and work profiles of each member of he cohor are based on he laes relevan daa available. k k

5 Among ohers hings, he approach shows how he changes in he profiles of he borrowers over ime affec he inflow of loan repaymens and in urn, how hese loan repaymens compare wih he loan amoun disbursed and he oal cos of provision of public higher educaion. The advanage of he model is ha various scenarios can be compared under a range of parameer values assumed. The differen scenarios basically involved changing some parameers of he ICSL scheme, namely, he ineres rae, discoun rae, repaymen rae, and income growh and deermining he effec on he performance indicaors. Hence, useful informaion generaed from he process would be on how he recovery raes respond o changes in he parameers of he scheme. The main performance indicaors of he assessmen are he cos recovery rae and he loan recovery rae. The former measures he fracion of he cos of provision recovered hrough uiion and/ or loan mechanisms, while he laer measures he proporion of he loan repaid o he oal loan amoun disbursed. III. Benchmark Figures and Assumpions Baseline Cos Recovery Rae. Alhough sae universiies and colleges (SUCs) have been charging uiion fees, hese fees cover only a very small percenage of he oal funding needs of SUCs. In 00, only 6% of he oal receips of SUCs are from uiion fees and % are from oher income colleced from sudens. Expressing hese receips from sudens as a percenage of he SUC appropriaions for curren operaing expendiures ii ranslaes o a cos recovery rae of 9.5%. Moreover, he curren operaing expendiure and he receips from uiion and oher suden fees indicae ha he curren privae-public share of he burden of he cos is 9.5% %. Based on he argumen ha higher educaion generaes greaer privae benefis han social benefis, i would be ideal if he curren disribuion of he burden of he cos of higher educaion is reversed. Base Varian Assumpion. The assumpions under he base varian are as follows: a) The saring year is 00, he year ha he cohor eners higher educaion. b) The ICSL loan coverage is universal. c) There is zero subsidy on uiion cos. Tha is, he enire cos of provision is passed on o he suden, which is se a P0,, he average cos per suden for SY d) The real rae of uiion cos growh is assumed o be %.

6 e) Living cos for he iniial year is se a P0,000 and increasing annually a he same rae as uiion fees. f) The full uiion and living coss are fully covered by he loan. g) There is zero real ineres on ousanding loan. h) Repaymen rae sars from 4% of he gross amoun of income falling in he firs caegory above he earnings hreshold. For each income caegory hereafer, he incremenal rae of repaymen is 0.5%. Earnings hreshold is based on he individual level average income, which was P5,774 in 00 iii. j) There is a % real income growh. The presen values of he income coningen repaymens, loan disbursemens, and cos of provision are compued using a 7% real discoun rae iv. Sensiiviy Analysis. To es he sensiiviy of he performance indicaors o various parameer changes, alernaive assumpions were made for several key parameers namely: uiion subsidy level, ineres rae, repaymen rae, and income growh. Addiional Simulaions. To deermine he changes in he loan and cos recovery raes in response o changes in he level of ET and in he coverage of he scheme (specifically, a varian wih means-esing), addiional simulaions for his purpose were underaken v, IV. Simulaion Resuls Base Varian. Under he base varian, he assumpion of zero subsidy rae on uiion fees implies ha he oal cos is passed on o he sudens. The loan incurred herefore is equivalen o he oal cos of educaion. Hence, he loan recovery rae and he cos recovery rae are equal under he case of zero subsidy on uiion. The resuls indicae ha from he cohor s firs enry o he universiy up o reiremen, only 5.75% of he uiion and living coss advanced by he governmen will be recovered using a 7% real discoun rae. On a periodic basis, he resuls reveal ha on he 0 h year from he suden s firs enry o he universiy, he loan and recovery raes are only 4.45%, increasing o 0.79% in he 0 h year. By he end of he 40 h year, a minimal improvemen is seen wih 5.44% recovery rae and increasing only by 0. percenage poin o he 49 h year, which is he year when he suden in he cohor reaches he mandaory reiremen age, which is 65 years old vi. The slow inflow of repaymens implies ha he scheme canno address he shorerm funding requiremens of he SUCs. In fac, he scheme will coninue o rely on

7 addiional injecion of funds from he governmen o finance he loan applicaions year afer year. Moreover, his slow pace of cos recovery may no keep up wih he rapid annual increases in SUC enrolmen and consequenly, on he annual increase in loan ake-up rae. Hence, he scheme will no be able o finance he new loans. In erms of he resuling balance beween he public-privae share of he cos, resuls indicae ha a bes, he scheme can poenially increase he privae share o 5.75%. This implies ha he scheme is unable o reverse he curren balance since he public share of he cos remains several folds higher han he privae share. Moreover, i mus be noed ha while he 9.5% recovery rae under he exising se-up is immediaely realized, he 5.75% recovery rae for he oal governmen disbursemens in six years under he ICSL scheme is realized only afer four decades. The low level of loan and cos recovery raes can be mainly aribued o he low labour force paricipaion rae of women and o he fac ha he disribuion of workers is skewed oward he lower income brackes. Moreover, i mus be noed ha a significan proporion of he sudens in he cohor would no have successfully compleed universiy educaion and herefore would have low fuure incomes. The highes recovery raes are from he graduaes, wih 0.8%, compared o 7.% among he non-graduaes. The low loan and cos recovery raes from he non -graduaes are due o he fac ha abou 79% have incomes below he average income (which again is he earnings hreshold), leaving only % of workers making periodic repaymens. Secondly, alhough 7% of graduaes have incomes higher han he hreshold, 50% are in he firs income caegory ha is required o make repaymens. This means ha he majoriy of hose required o make repaymens are only repaying he lowes required amoun of repaymen, which is 4% of income. Only.7% of graduaes are in he five (5) highes income caegories ou of he nine (9) income caegories. Beween male and female graduaes, recovery rae is higher for males. Among he graduaes, recovery rae from males is 4.8% compared o 6.79% from female graduaes. Among non-graduaes, expeced recovery rae from males is 8.6% and 6.4% from female non-graduaes. This considerable difference can be explained by hree facors. Firsly, his can be aribued o he subsanially higher labour force paricipaion rae of men per agegroup compared o ha of women. Secondly, employmen raes for men were consisenly higher han hose of women in all age-groups. Thirdly, men, on average, have higher earnings han women.

8 In erms of he percenage of borrowers who fully repaid heir loans, as expeced, he highes percenage is recorded for male graduaes wih 7.5%, followed by female graduaes wih 7.4%. Among he non-graduaes, a meagre.% among males and 0.75% among females were fully able o repay heir loans. They are he ones who sayed only for a few years in he universiy and hence, incurred lower deb and sared repaying earlier han hose who sayed longer in he universiy. Overall, 50.% of he sudens in he cohor were able o fully repay heir loans. I is also ineresing o noe he proporion of individuals who have no made any repaymens a all. Upon reaching he mandaory age of reiremen, 49.% of hose in he cohor did no make any repaymens a all. I should be noed ha he simulaion assumed a zero rae of repaymen evasion or avoidance from he cohor and here were also no assumpions on adminisraive cos in he simulaions vii. However, loan defaul is likely o be a problem, as shown by he experience wih he counry s Sudy Now Pay Laer Program (SNPLP). As Kiaev e al., (00) noed, he SNPLP had a very high defaul rae or, equivalenly, dismally low rae of repaymen, which is less han wo percen. Meanwhile, using he counry s axaion sysem for repaymen collecion (like in he case of Ausralia and he New Zealand) may no also be appropriae given is poor capabiliy o collec axes. Moreover, here is difficuly in accuraely deermining he incomes of workers, paricularly hose who are self-employed and have muliple jobs. Furhermore, he counry has high incidences of ax evasion and ax avoidance. Therefore, once adminisraive cos and loan defaul are impued ino he simulaion, he loan and cos recovery raes would be furher reduced. V. Sensiiviy Analysis Subsidy Rae on Tuiion. Simulaions were run for cases where ex ane subsidies viii on uiion are provided. This was underaken because, alhough i has been argued ha i is he suden who benefis he mos from his/ her higher educaion, his does no mean ha he public subsidy should be alogeher removed. I remains valid for he governmen o provide a subsidy as some social benefis are realized. However, governmen s share of he burden of he cos mus be lower han ha of he higher educaion recipiens. The resuls reveal ha here will be a higher loan recovery rae for a higher level of uiion subsidy rae. This is because, wih a higher subsidy rae on uiion, a suden upon leaving he universiy would have incurred a lower level of accumulaed loan han wih lower

9 or a zero subsidy, on uiion. Necessarily, a lower amoun of accumulaed loan would be easier o fully repay han a higher level of accumulaed loan. Moreover, he ineres on a lower level of principal will likewise be lower. Consequenly, for he same level of fuure income, borrowers can easily pay-off heir suden deb incurred under a high uiion subsidy rae. For every 5 percenage poins increase in subsidy level, he loan recovery rae increases a an increasing rae, wih.8%,.%, and 4.76% increases under 5%, 50%, and 75% subsidy rae, respecively. On average, he loan recovery rae increases by.% for 5 percenage poin increases in he subsidy rae. Meanwhile, he higher he subsidy level on uiion, he lower will be he expeced cos recovery rae. For a 5 percenage poin increase in subsidy level, he cos recovery rae decreases on average by 0.4%. The growing decreases in cos recovery raes (as uiion subsidy levels increase) reflecs he resul of providing boh ex ane and ex pos subsidies o sudens. Ineres Rae. The base case assumes a zero real ineres rae on loans. This implies ha he cos of defaul is fully shifed o he governmen. To allow for a cerain degree of risk pooling ix among sudens wihin he cohor, simulaions were also run under differen assumpions of real ineres rae x. Resuls indicae ha he recovery raes are correspondingly higher for higher levels of he real ineres rae. The cos of defaul is reduced as he ineres rae on loan is increased. However, i mus be noed ha he loan recovery and cos recovery raes are no very responsive o increases in real ineres rae. For insance, under he assumpion of zero subsidy rae on uiion, he loan and cos recovery raes remain no more han 6% wih an increase in he real ineres rae from % o 4%. Repaymen Rae. The simulaion resuls indicae he eviden high level of responsiveness of he recovery raes o increases in he repaymen raes. I mus be noed ha increasing he minimum repaymen rae subsanially increases he levels of he performance indicaors, bu a a diminishing rae. The recovery raes are more highly responsive o changes in he lower levels of minimum repaymen raes han a he higher levels of repaymens raes. For insance, increasing he minimum repaymen rae from % o % under he zero uiion subsidy significanly increases he recovery raes by 6.4%. Likewise, an increase from % o % minimum repaymen rae increases he recovery raes by abou.4%.

10 However, while he recovery raes coninue o increase wih he increases in minimum repaymen raes, he recovery raes sar o diminish, paricularly afer he % minimum repaymen rae level. I is worhwhile o noe ha when he minimum repaymen rae is increased, only he proporion of repaymen (and herefore he amoun of repaymen) from hose who are already repaying is increased. The number of borrowers making repaymens does no increase when he minimum repaymen rae is increased. This means ha increasing he minimum repaymen rae increases he deb repaymen burden among hose whose incomes are beyond he earnings hreshold. Since he repaymen rae is levied on op of he ax rae, his effecively increases he ax deducions on hose whose incomes are above he earnings hreshold. Hence, cauion mus be aken in selecing he repaymen rae so as no o cause labour supply disorion. Income Growh. The loan and cos recovery raes posiively vary wih income. Simulaion resuls show ha a lower level of assumed income growh ranslaes o lower loan and cos recovery raes, while higher levels of growh correspondingly resul in higher recovery raes. I is also ineresing o noe he high level of responsiveness of he performance indicaors o income growh. Bu, as in he case wih he repaymen rae, he cos and loan recovery raes are increasing a a diminishing rae. VI. Addiional Simulaion Runs Case Wihou Earnings Threshold and Case Wih Reduced Earnings Threshold. Based on he profiles of he borrowers, a loan feaure ha can significanly improve he recovery raes and he proporion of borrowers repaying heir debs would be he earnings hreshold (ET). Reducing he earnings hreshold or removing i as one of he loan feaures widens he base of borrowers required o make repaymens. Simulaions were run under a zero subsidy level and a 75% subsidy level wih he following assumpions: ) earnings hreshold is se a 75% of average income level, and ) all oher parameers are in he base case values. Anoher se of simulaions were run under a zero subsidy level and a 75% subsidy level wih he following assumpions: ) here is no earnings hreshold, implying ha all income earning borrowers are required o make repaymens, and ) all ohers parameers in heir base varian values remain he same. In eiher case (reduced ET and wihou ET), he loan and cos recovery raes are subsanially higher han hose under he varians wih earnings hreshold se a he average

11 level of income. However, under eiher of hese arrangemens, here would be he necessary rade-off beween a greaer deb burden on he borrowers and he effecive cos recovery, paricularly under he scheme wihou an earnings hreshold. While here will be more effecive cos recovery, he greaer repaymen rae will place a greaer deb repaymen burden, paricularly among hose wih lower incomes xi. Case wih Means-Tesing. The simulaion wih means-esing assumes full upfron paymen by sudens from he op hree income quiniles and full defermen of uiion and living coss by suden from he lowes wo () quiniles. The cos recovery rae under an ICSL wih means-esing is subsanially higher, wih 49.%, compared o he ICSL base case resul of 5.75%. This is because here are now wo sources of he inflows: one is from he upfron paymen for uiion fees, and he oher from he loan repaymen. The condiion of upfron paymen of fees by sudens from well-off backgrounds generaes a 00% recovery of he cos of provision from his group of sudens. More imporanly, here is an assured immediae inflow of funds, hereby helping o relieve he need for addiional injecions of public funds o finance new loans. Aside from achieving greaer cos recovery, a means-esed ICSL will resul in he concenraion of assisance o sudens who need and deserve i he mos, hereby increasing he efficiency in he use of funds inended for suden financial assisance and reducing regressiviy in public higher educaion financing. VII. Synhesis This paper has assessed he financial performance of an income coningen suden loan scheme as a cos recovery mechanism in he Philippine public higher educaion sysem. I was shown ha cos recovery under he base case would be 5.75%. This is higher han he 9.5% cos recovery rae under he presen se-up. The simulaions provide imporan insighs as o which loan feaures have significan impac on cos recovery and loan recovery. Apar from he provision of a low uiion subsidy, anoher key loan feaure ha generaes high cos recovery is he repaymen rae. However, i is noed ha cauion mus be aken in selecing he repaymen rae so ha oal ax deducions of borrowers are no so high as o cause disorion in labour supply. The reducion or he removal of he earnings hreshold also dramaically improves he financial performance of he scheme. Likewise, due consideraion needs o be given o he resuling deb repaymen burden, paricularly among hose in he lower income brackes.

12 However, i is noed ha in general, he public share of he burden of he cos of higher educaion remains higher han he privae share. I is only under a means-esed ICSL varian ha he cos recovery from he cohor is more han 50%. In sum, given he specific circumsances of he Philippines a his sage, here will be real difficuly of implemening a large scale universal income coningen loan scheme. An ICSL scheme will no largely address he cos recovery and funding concerns under he more realisic assumpions of he loan feaures and relevan macroeconomic condiions. However, here is need o explore he poenial for a selecive and narrower ICSL scheme o form par of a bogger package of he Philippines public higher educaion sysem.

13 References Alburo, F. & Abella, D. (00), Skilled Labor Migraion from Developing Counries: Sudy on he Philippines, Inernaional Labour Office, Geneva. Asian Developmen Bank. <<hp:// Asian Developmen Bank. (00), Counry Economic Review: Philippines, Asian Developmen Bank, Manila. Asian Developmen Bank. (004a), Counry Gender Assessmen: Philippines, Asian Developmen Bank, Manila. Asian Developmen Bank and World Bank. (999), Philippine Educaion for he s Cenury: The 998 Philippine Educaion Secor Sudy, Asian Developmen Bank, Manila. Bureau of Labor and Employmen Saisics. (004a), Labor Cos in he Philippines (Firs of a series), Labsa Updaes, Vol. 8, No. 5, pp. -. Bureau of Labor and Employmen Saisics. (004b), Labor Cos in he Philippines (Second of an eigh-par series), Labsa Updaes, Vol. 8, No., pp. -. Bureau of Labor and Employmen Saisics. (005a), Saisics on Par-Time Workers in Non- Agriculural Esablishmens wih 0 or More Workers: 00 (Third of a series on employmen), Labsa Updaes, Vol. 9, No. 6, pp. -. Bureau of Labor and Employmen Saisics. (005b), Labor Cos in he Philippines (Fourh of an eigh-par series), Labsa Updaes, Vol. 9, No., pp. -4. Bureau of Labor and Employmen Saisics. (005c), Labor Cos in he Philippines (Fifh of an eighpar series), Labsa Updaes, Vol. 9, No. 5, pp. -4. Bureau of Labor and Employmen Saisics. (005d), Labor Cos in he Philippines (Sixh of an eighpar series), Labsa Updaes, Vol. 9, No. 7, pp. -. Bureau of Labor and Employmen Saisics. (005e), Labor Cos in he Philippines (Fifh of an eighpar series), Labsa Updaes, Vol. 9, No. 8, pp. -. Chapman, B. (999). "Reform of Ehiopian Higher Educaion Financing: Concepual and Policy Issues", Economics of Educaion Series, Economics of Educaion Themaic Group, World Bank. Chapman, B. & Ryan, C. (00a), The Access Implicaion of Income Coningen Charges for Higher Educaion: Lesson from Ausralia, Cenre for Economic Policy Research Discussion Paper No. 46, Ausralian Naional Universiy. Chapman, B. & Ryan, C. (00b), Higher Educaion Fi nancing and Suden Access: A Review of Lieraure, Economics Program Research School of Social Sciences, Ausralian Naional Universiy. Commission on Higher Educaion (CHED). <<hp:// Deparmen of Budge and Managemen. (00), Budge of Expendiures and Sources of Financing Fiscal Year 00, DBM, Manila. Deparmen of Budge and Managemen (various years), General Appropriaions Ac, DBM, Manila. Friedman, M. (955), The Role of Governmen in Educaion, In R. Solo (Ed), Economics and he Public Ineres, N.J. Rugers Universiy Press, New Jersey. <<hp. (Accessed < Sepember 004>). Jacobs, B. (00), An Invesigaion of Educaion Finance Reform: Graduae Taxes and Income Coningen Loans in he Neherlands, CPB Discussion Paper No. 9, Neherlands. Johanson, R. (999), Higher Educaion in he Philippines, Technical Background Paper No. of he 998 Philippine Educaion Secor Sudy, Asian Developmen Bank, Manila.

14 Kiaev, I., Naduraa, T., e al. (00), Suden Loans in he Philippines: Lessons from he Pas, UNESCO, Bangkok. Liu, X. (00), Counry Economic Review: Philippines, Asian Developmen Bank, Manila. Manasan, R. (98), "Public Finance in he Philippines: A Review of Lieraure", Philippine Insiue of Developmen Sudies Discussion Paper, Makai Ciy. Manasan, R. (998), "Fiscal Adjusmen in he Conex of Growh and Equiy, ", Philippine Insiue of Developmen Sudies Discussion Paper Series No. 98-, Makai Ciy. Manasan, R. (00), "Tax Adminisraion: (Semi-) Auonomous Revenue Auhoriy Anyone?", Discussion Paper Series No (Revised), Philippine Insiue of Developmen Sudies. Naional Saisical Coordinaion Board (NSCB). <<hp:// Naional Saisics Office (NSO). <<hp:// Naional Saisics Office. (994), 994 Funcional Lieracy, Educaion and Mass Media Survey (FLEMMS), NSO, Manila. Naional Saisics Office. (997), Family Income and Expendiure Survey, Naional Saisics Office, Manila. Naional Saisics Office. (000), Family Income and Expendiure Survey, Naional Saisics Office, Manila. Naional Saisics Office. (00a), 00 Annual Povery Indicaor Survey, Naional Saisics Office, Manila. Naional Saisics Office. (00b), 00 Philippine Yearbook, Naional Saisics Office, Manila. Naional Saisical Coordinaion Board. (00), 00 Philippine Saisical Yearbook, NSCB, Manila. Orbea, A. (00), Educaion, Labor Marke and Developmen: A Review of he Trends and Issues in he Philippines for he Pas 5 Years, Philippine Insiue of Developmen Sudies, Makai Ciy. Presidenial Commission on Educaional Reform. (000), Philippine Agenda for Educaional Reform: The PCER Repor, Manila. Reyes, C. (00), Movemens In and Ou of Povery in he Philippines, Paper presened in a conference on Assessmen of Povery R educion Policies, Raba-Morocco. Schelzig, K. (005), Povery in he Philippines: Income, Asses, and Access, Asian Developmen Bank, Manila. Tan, E. (?004), "School Fee Srucure and Inflaion in Philippine Higher Educaion", Universiy of he Philippines, Manila. Universiy of he Philippines (UPM-OSA) <<hp:// (Accessed <8 January 004> ). Vodopivec, M. (004), "A Simulaion of an Income Coningen Tuiion Scheme in a Transiion Economy," Insiue of he Sudy of Labor Discussion Paper No. 47, Universiy of Bonn. Ziderman, A. & Albrech, D. (995), Financing Universiies in Developing Counries, Falmer Press, Washingon.

15 Appendix A The ICSL Simulaion Process In order o undersand he funcioning of an income coningen loan scheme model described in Secion of he main ex, his appendix will discuss in deail he mehodological seps and assumpions made in simulaing he sreams of annual loan disbursemens and annual income coningen repa ymens from each borrower in he cohor.. Simulaion Cohor A hypoheical cohor of sudens was consruced o model he performance of an income coningen suden loan scheme in he Philippines. A sample of,05 hypoheical sudens of he 00 cohor of firs year college sudens is aken. This sample was deermined using he following formula: n N + N ( e) =, Equaion () where n is he sample size, N is he populaion size and e is he level of precision. The relevan populaion size is he oal SUC enrolmen in he firs year level in SY which was 0,888. A 97% confidence level and e=% give a sample size of,05. Alhough he cohor is hypoheical, he generaed socio-economic, educaion, and labour profiles of each suden in he cohor are based on he relevan 00 daa, or he nex laes daa available. I mus be noed ha since he assignmen of socio-economic, educaion, labour, employmen, and earnings profiles are driven by he probabilisic assumpions of hese key variables, he model does no indicae he number of borrowers of a given combinaion of characerisics. However, he model can disinguish beween he oal amoun of loan aken ou and he repaymen seam of borrowers by educaional aainmen (graduae/ non-graduae), by gender, and accordingly, i can deermine he loan recovery and cos recovery raes by educaional aainmen and by gender.. Simulaion Time Periods The ime period () in he model covers he years beween and including he suden s enry o he universiy (=) and he year when he suden reaches he mandaory age of reiremen (=m). This ime period is furher subdivided ino ime periods j and k, ha is, ime period j is a subse of ime period or j, and ime period k is a subse of ime period or k. Time period j refers o he period beween and including he suden s enry o he universiy, which is (j=), and he suden s exi from he universiy, which is (=j=j*). Time period k refers o he suden s pos schooling period or his period of loan repaymen. The repaymen period sars a year afer he suden lef he universiy, which is (k==j+), and up o he year he suden reaches he mandaory age of reiremen, which is (k=m).. Simulaion Mehodological Seps a) Seing of he model parameers The fixed inpus of he simulaion model are he uiion fee and living coss. The model assumes a uniform uiion fee level. The assumed annual uiion fee ha each suden pays (TF j,n ) is equal o he average cos per suden (Cj) minus he amoun of governmen subsidy (Sj). TF = C S Equaion (4) j j j The esimae of he average cos per suden of P0, for =j=, which is he year ha he suden eners he universiy, is based on he 00 daa on SUC budge appropriaion and SUC enrolmen. I is compued as he sum of he budge appropriaion for personnel services (PS j ) and mainenance and oher operaing expense (MOOE j ) divided by he SUC oal enrolmen (TEN j ). The average cos per suden for he succeeding years is assumed o grow a he real rae of g o reflec he increases,

16 paricularly in curren expendiures, which includes salary of eachers and he expendiures relaed o operaion and mainenance of SUCs. PS + MOOE C = Equaion (5) TEN j C = C Equaion (6) j Governmen subsidy is he porion of he average cos per suden ha he governmen will shoulder. I is compued by muliplying he average cos per suden wih he governmen s subsidy rae (d). Separae simulaions are run for differen assumpions on he level of δ. S = δ Equaion (7) j C j b) Generaing he gender and socio-economic background of each hypoheical suden The cohor of sudens is firs disribued by gender which is also based on he acual disribuion of firs year sudens by gender in SUCs for SY Each suden in he cohor is hen assigned a socio-economic saus which is based on he combined income of his/her parens. This socioeconomic grouping of sudens is used in he simulaion of he ICSL varian ha allows for meansesing, ha is, one which requires upfron uiion among he well-off and allows uiion and living coss defermen only among he poor. Separae simulaions will be done for a universal ICSL scheme where all living and uiion coss are de ferred, regardless of he socio-economic background of sudens. The socio-economic saus assigned o each hypoheical suden is compuer-generaed (as are he sudy duraion, labour force saus, employmen saus, and earnings which will be discussed one by one in he following secions). This is done by firs assigning a compuer -generaed random number o each suden in he cohor. The model hen generaes he simulaed socio-economic saus of each suden by comparing he random number assigned o each suden wih he values in he reference able creaed on he disribuion of sudens by socio-economic saus. This disribuion is based on he acual daa which were originally aken from he 999 Annual Povery Indicaor Survey. c) Generaing he sudy duraion of each suden The disribuion of he sudens in he hypoheical cohor by sudy duraion is esimaed based on he Commission on Higher Educaion (CHED) daa on suden enrolmen by course, graduaion rae and cohor survival rae for SY The disribuion of suden enrolmen by course deermines he proporion of he sudens in he hypoheical cohor who enrolled in 4 -year, 5-year and 6-year degree courses. Daa on cohor survival rae and graduaion raes were used o esimae he proporion of hose sudens who drop ou and hose who successfully complee heir courses during he normal duraion of heir courses. Moreover, hese raes were used o esimae how many years he sudens who evenually drop ou were enrolled. I is assumed ha due o he inroducion of he scheme, cohor survival rae and graduaion rae each increased by 0%. A higher graduaion rae implies ha he proporion of graduaes in he hypoheical cohor is higher han ha in he acual case. In fac, based on he resuling compuaion, his assumpion reversed he disribuion beween graduae and non-graduaes in he acual case. Tha is, here are more graduaes han non-graduaes in he hypoheical cohor while here are more non-graduaes han graduaes in he acual case. On he oher hand, he assumpion of a higher cohor survival rae implies ha here are more non-graduaes wih higher number of years spen in he universiy in he hypoheical cohor han ha in he acual case. This ranslaes o a greaer proporion of borrowers wih higher earning capaciy and consequenly, paying capaciies in he simulaion cohor han in he acual case. Hence, he model uses as inpus beer levels of he relevan educaion indicaors han he acual prevailing raes. Similarly, he process of assigning a sudy duraion o each suden is he same as ha done in assigning a socio-economic background o each suden. A differen se of random numbers is generaed and correspondingly, a differen reference able is creaed for his purpose.

17 d) Deermining he annual deferred educaion cos and he accumulaed loan upon leaving he universiy of each borrower I is also assumed ha he amoun of annual loan aken ou by he sude n, (and hence, he annual loan disbursed by he governmen o each suden) is equal o he annual uiion fee and/ or living cos. Hence, he annual loan aken ou by suden n a anyime j is given by Equaion 8 below. Table shows he deailed derivaion of his equaion. j L j = TFj = TFj( + g) Equaion (8a) j L j = TF j + LC j = ( TF j + LC j ) Equaion (8b) Alhough loan repaymens are assumed no required while he borrower is sill in he universiy, each borrower s ousanding loan accumulaes ineres. I is assumed ha a suden leaves he universiy eiher by graduaion or by dropping ou. Hence, alhough a uniform uiion fee is assumed, he oal indebedness of each suden upon leaving he universiy varies. Tha is, a suden wih longer sudy duraion will have larger accumulaed amoun of suden loan han hose wih shorer sudy duraion or hose who dropped ou. I is also assumed ha he maximum number of years ha a suden can avail hemselves of a loan (and herefore defer uiion and living cos paymen) is consisen wih he number of years i normally akes o complee his/ her degree. This implies ha sudens who do no finish heir degrees on ime are required o find alernaive fund sources o finance heir educaion. The accumulaed loan of borrower n upon leaving he universiy is given by Equaion 9. j = j* j* j j j* = TF + + = ( ( g) j AL Equaion (9) where j, as noed earlier, refers o he period beween and including he suden s enry o he universiy (=j=) and he suden s exi from he universiy (=j=j*), g is he annual growh of uiion cos, i is he ineres rae on loan. The deailed derivaion of he equaion is also shown in Table. e) Compuaion of he annual loan disbursemen o he cohor, he oal of he loan disbursemens o he cohor and oal cos of provision o he cohor Following from he calculaions in he previous sep, he sream of annual loan disbursemens (AD ) o he cohor of sudens is simply equal o he sum of he annual uiion fee (TF ) and/ or living coss (LC ) deferred by N sudens per year. AD = TF N Equaion (0a) j = j= 6 = j= = j = 6 j = ( TF + ) = j= LC AD N Equaion (0b) Since he sudy duraion per suden varies from one year o six years, he relevan period of disbursemen is Thus, oal loan disbursed (TD) o he cohor is compued as follows: = j= 6 TD = AD Equaion () j = j= As for he oal governmen cos of provision, i can be seen from Equaions 4 and 7 ha if δ=0, he sudens bear he enire burden of he cos of provision, ha is, he annual uiion fee is equal o he average cos per suden. I follows ha he oal of he sream of annual loan disbursemens under zero subsidy also reflecs he full governmen cos of provision o he cohor. The discouned cash flow echnique was used o conver he oal loan disbursemens in presen value erms o make i direcly comparable wih he oal loan repaymens. The presen value of oal disbursemens is given by Equaion. The noaions a and b in he equaion number indicaes he case wihou living cos and wih living cos, respecively.

18 TD ( + r) PVTD Equaion () = The real discoun rae (r) is se a 7%. The basis of his assumpi on is discussed again laer. f) Generaing he lifeime labour force saus of each borrower afer leaving he universiy Likewise, each suden in he cohor is assigned a lifeime labour force profile. The simulaed profile of each is based on he 00 daa on labour force paricipaion rae (LFPR) by sex. A differen se of random numbers is generaed for labour force saus assignmen. The probabiliy of a borrower s enry o and exi from he labour force hroughou his/ her lifecycle is capured in he assumpion of differen labour force paricipaion raes by age group and heir changing probabiliy of labour force saus year afer year.

19 Years in he Universiy j= Table. Equaions for Annual Loan (L j ) and Accumulaed Loan upon Leaving he Universiy (Al j ) Annual Loan (L j ) Accumulaed Loan Upon Leaving he Universiy (AL j ) L = = TF TF AL = TF j= L ( = TF = TF + g) AL ( = TF + j= j=4 j=5 j=6 J L + TF = TF ( g) = AL = [ TF ( + TF ( + g )]( + TF ( + g L + 4 TF4 = TF ( g) ) AL + = TF ( + ( ( g) = AL 4 = [ TF ( + ( ]( AL = [ TF ( + + TF ( + TF ( ] + TF ( + g L TF5 = TF ( g ) 4 ) 4 = AL 5 = [ TF ( ( + g )( ( ( + g ) ]( 4 4 AL 5 = [ TF ( ( + g )( ( ( + g ) + ( ] ( + g ) L TF6 = TF ( g ) j = AL 6 = [ TF ( ( + g )( ( + ( ]( ( + g ) AL 6 = [ TF ( ( (+ (+ g) ( (+ g) (+ ] (+ g) L = TF j = TF j j AL AL j = TF j* = j j = j j j j ( ( +... ( j j* j* j j * = TF + + ( ( g) Noe: The equaion for he annual loan (L j) and accumulaed loan (AL j) for he case wih living cos would have TF j+lc j in place of all he TF j in he equaions shown above. g) Generaing he lifeime employmen profile of each borrower afer leaving he universiy Similarly, each suden in he cohor is assigned a lifeime employmen profile. The simulaed profiles are based on he 00 daa on employmen rae by sex. A new se of random numbers is generaed for he simulaed employmen saus of each borrower. The probabiliy of a changing employmen saus per suden year afer year is capured in he assumpion of differen employmen and unemploymen raes by age group and heir changing probabiliy of employmen saus year afer year.

20 h) Generaing he annual earnings of each borrower In accordance wih he specificaion of he ICSL model described in Equaions and, he model simulaes annual ICSL repaymens only for borrowers who are employed and whose earnings reached he earnings hreshold. Zero annual repaymens are refleced for he unemployed and for hose whose incomes fall below he earnings hreshold. I is assumed, however, ha ineres accrues on he ousanding loan even during he period when he borrower is exemped from making a loan repaymen. Ideally, he lifeime earning profiles of workers should be esimaed based on panel daa. In he absence of eiher panel daa, ime series or cross secional daa o perform an economeric esimaion of he ageearnings profiles of borrowers by course, various published resuls of naional surveys and exising relaed sudies on earnings are used o form he assumpions on he lifeime earnings of borrowers. This is one of he unavoidable limiaions of he mehodology a he ime of he sudy. However, his is, o an exen, deal wih in he differen simulaion runs which allow for varying levels of income growh. Moreover, i mus be noed ha he daa from which he assumpions on earnings were based would generae opimisic projecions of incomes raher han conservaive levels of income. A his poin, i is imporan o noe ha alhough income measured is a he family level, iniial resuls of he 00 Family Income and Expendiure Survey noed ha since 000, average family income growh has no kep pace wih inflaion growh, despie he overall growh of he economy (Schelzig, 005). Saisics from he Naional Saisics Office do no provide daa on he disribuion of workers by income caegory. However, he Commission on Higher Educaion conduced a survey for a Tracer Sudy done in 997 where daa on he disribuion of 995 graduaes from public and from privae universiies by income caegory was generaed. Hence, he annual earnings levels and disribuion of graduaes (from public universiies) by income caegory are based on he daa generaed for he said CHED Tracer Sudy in 997. Since his sudy is based in real erms a 00 prices, he appropriae adjusmens were made. Male graduaes are assumed o have incomes which are 5% higher han average, while hose of female graduaes are assumed o be 5% lower han average. All employed graduaes are assumed o be working full-ime becaus e par-ime jobs are no very popular among graduaes. For he base varian of ICSL, annual earnings are assumed o increase a an annual real rae of %. Correspondingly, earnings hreshold, which is based on he average income, also changes every year. I is, however, assumed ha he percenage disribuion of workers by income caegory does no change over ime. In relaed empirical sudies, esimaes of he earnings of sudens who are no able o complee higher educaion degrees are based on earnings levels of high school graduaes. In he absence of his daa in he Philippines, earnings for he male and female non-graduaes are assumed o be 0% lower han hose of he 00 esimaed earnings of male and female college graduae workers. Compuaion of annual loan repaymens and ousanding balance per year-end per borrower As noed earlier, he sream of annual repaymens from each borrower is compued, based on Equaions and (which are shown again below for easy reference). In his sudy, he repaymen rae is assumed o increase wih earnings. Tha is, dα/dw>0. The required periodic repaymens are firs deduced from accrued ineres and he remaining amoun is deduced on he ousanding balance on principal. If repaymens do no cover he full amoun of he accrued ineres, he remaining unpaid ineres is capialized. Hence, he ousanding loans for some borrowers are inclusive of he capialized ineres. Equaion below shows how he ousanding loan is compued. Table shows he deailed derivaion of his equaion. The ousanding loan, say for he firs year of he repaymen period (k=), is simply he accumulaed loan upon leaving he universiy plus he ineres on loan (AL*(+) minus he amoun of repaymen made during he year (AR k ). Meanwhile, Equaion 4 below indicaes ha loan repaymen sops when he sum of annual repaymens equals he accumulaed loan, or equivalenly, when he ousanding loan of any borrower n a ime k* is equal o zero. Also, repa ymen sops when he borrower reires. In he Philippines, he mandaory age of reiremen is 65. Hence, a he age of 66, he borrower is no required o make any ICSL repaymen regardless of his/ her ousanding loan amoun. Any ousanding loan is for given. AR k, n = ( wk, n ), where wk, n α ET Equaion () AR 0 < ET Equaion () k, n =, where wk, n k k

21 * k* k= k* k* k OL k*, n = ALn( + k= ARk ( Equaion () * k* k= k* k* k OL = AL ( + AR ( 0 Equaion (4) k*, n n k= k = Table. Equaions for Required Annual Repaymen (AR k ) and Ousanding Loan during Repaymen Period (OL k ) Repaymen Required Annual Ousanding Loan During Repaymen Period (OL Years (k) Repaymen(AR k ) k ) K= K= K= K AR AR AR AR = α w = α w = α w k w k OL OL OL OL OL * = AL + ( AR * = AL ( AR]( [ AR * = AL + AR( ( AR * = AL ( AR( AR ]( [ AR * = AL AR( AR( = α * k = + k OL ( ) = k AL i k = ( AR k* k* k * AR ( + ) k i The model also compues he annual ousanding balance on principal and ineres and he cumulaive principal and ineres paymens, which in urn enables he compuaion of periodic performance indicaors wihin he repaymen period. j) Compuaion of oal loan repaymen The oal loan repaymen (TR) a any ime is simply he cumulaive sum of he annual loan repaymens made by all borrowers o dae. Specifically, i is compued as follows: = m = k n= N n= TR = w α Equaion (5), n The year =m represen he 49 h year since he cohor s firs enry o he universiy. This is also he year 050 when he cohor would have all reached he mandaory age of reiremen which is 65. To make he oal loan repaymens comparable wih he oal loan disbursemens, he presen value of he annual oal loan repaymens is compued. TR PVTR Equaion (6) = ( + r) k) Compuing he performance indicaors As noed in he inroducion of his chaper, he main performance indicaors of he financial performance of he scheme are he cos recovery rae and he loan recovery rae. The cos recovery rae (CR) measures he porion of he cos of provision recovered hrough uiion and/ or loan mechanisms. I mus be noed again ha he oal governmen cos of provision is equivalen o he oal annual loan disbursemen wih zero subsidy level on uiion (δ=0). PVTR = where δ = 0 PVTD CR Equaion (7) The loan recovery rae (LR) measures he proporion of he loan repaid o he oal loan amoun disbursed PVTR LR = Equaion (8) PVTD Figure shows he flow of he simulaion of income coningen loan suden loan scheme used in his sudy.

22 Figure. Flowchar for Income Coningen Suden Loan Scheme Simulaion Suden eners higher educaion Generae socioeconomic background Qualified for loan? No Yes Generae sudy duraion Annual loan compued. Accumulaed loan upon leaving universiy compued Tuiion fee charged upfron Generae labour force saus No In labour force? Yes No repaymen required. Deermine labor saus he following year. Generae employmen saus No Employ ed? Yes Generae earnings Earning above average income? No Yes Corresponding repaymen rae deermined and amoun of required annual repaymen compued. Repaymen deduced on ineres due Required repaymen fully covers ineres due? Yes Made paymen on principal? Yes Amoun paid on principal and ousanding balance on principal compued. No No Amoun of ineres paid recorded, unpaid ineres capialized New loan balance compued Deb forgiven. Repaymen sopped. Yes Reached reiremen age? Yes Any ousanding balance lef? No Deb fully repaid. Repaymen sopped.g No

23 i Income coningen loans gained much aenion in governmen policy discussion in he 990s. However, he heoreical foundaion of he scheme may be raced back o around fify years ago in Friedman s(955) works. Currenly, varians of he scheme are also being implemened in Ausralia, New Zealand, Sweden, Souh Africa and he Unied Kingdom. More recenly, he scheme has araced discussion in counries such as he Neherlands and Slovenia and oher developing counries as Ehiopia, Hungary, Rwanda, Malaysia, and he Philippines (Chapman, 999). ii The curren operaing expendiure is he sum of he expendiures for personnel services (PS) and mainenance and oher operaing expense (MOOE). (DBM, 00) iii This is based on he 00/00 Inegraed Survey conduced by he Bureau of Labor and Employmen Saisics. iv This rae is based he average of he 0-year Treasury bond yields for of % minus he inflaion rae of 6%. Hence, 7% is a risk fee real discoun rae. v Addiional simulaion runs which involve changing he levels of relevan macroeconomic oucomes (labour force paricipaion rae, employmen rae, income growh) were also underaken in he full-blown hesis. vi The 0 h, 0 h, 0 h, and 40 h years are he years 0, 0, 0 and 04, respecively and he years when he sudens in he cohor urn 6, 6, 46, and 56 years old, respecively. The 49 h year corresponds o he year 050 when he sudens in he cohor urn 65 years old. vii As an indicaion of he likely adminisraive cos for adminisering a loan program, he curren SNPL program has an adminisraive cos of.75% of he oal allocaion for he program (Kiaev e al, 00). viii Ex ane subsidy means ha he uiion cos is se lower han he average cos per suden. Meanwhile, an ex pos subsidy is one ha is no provided o sudens while hey are sill sudying bu only upon he leaving he universiy, and are no able o repay heir income coningen suden deb due o absence or inadequacy of income (Jacobs, 00). ix According o Jacobs (00, p.4) risk pooling is an insurance sysem, where risks of defaul are shared among graduaes. The ineres rae on he loans conains a premium o cover he coss of `defaul' of hose who are no able o repay. Therefore, sudens who succeed in repaying heir loan are paying he coss of non repaymen of hose who fail. x Under he assumpion of a posiive real ineres rae, borrowers who are required o make repaymens will effecively be paying for he cos of defaul among hose whose income fall below he earnings hreshold (Jacobs, 00). These sudens who are making repaymens under a posiive ineres rae are receiving a lower subsidy han hey would oherwise receive under a zero (or negaive) real ineres rae. xi I mus be noed however ha removing or reducing earnings he hreshold below he average income level and hereby placing a grea repaymen burden on he borrower would lessen he scheme s advanage over a morgage ype suden loan in erms of is manageabiliy of repaymen, and similarly in erms of he insurance agains a heavy deb burden ha i provides o hose earning low incomes. Moreover, such a design may remove he incenive for sudens o underake higher educaion.