Student loans Goals and European experiences Hans Vossensteyn Center for Higher Education Policy Studies International conference of the Rectorate of the University of Lisbon Increasing accessibility to higher education Some international examples on student loans Lisbon 2 - J u n e 2 0 0 8
Challenges to higher education Increasing demand for higher education services Limited public budgets Need for new income, therefore Cost sharing: Shifting part of the burden of HE costs from the government (taxpayers) to parents and students Johnstone Problem of access to higher education Loans deemed necessary but controversial because of debt aversion and perceived access problems
Indeed strong overrepresentation of higher socio-economic status groups Country % of students from ethnic % of fathers blue collar worker % of fathers with higher education % of students from lowest income minorities students all students all groups (quartile) Austria 17% 41% 26% 10% 17% Australia 4% 15% Belgium NL 50% 22% 3% Belgium FR 19% 45% 50% 15% Canada 16% 20% Finland 28% 30% 23% 14% France 20% 34% 38% 21% 12% Germany 19% 37% 37% 16% 7% Ireland 24% 38% 30% 19% Italy 14% 32% 19% 9% Netherlands 8% 39% 26% 9% UK 19% 13% USA 29%
Loans just one element in complex of students finances subsidies, grants GOVERNMENT budget, guarantees tax benefits, family allowances HE institutions budget, guarantees intermediaries / banks loans parents tuition fees grants, scholarships, loans, tuition waivers parental contributions grants, scholarships, tuition waivers, loans STUDENTS free earning amount jobs
Loans: potential ways GOVERNMENT BANKS budget guarantee student support agency loans loans STUDENTS
Why student loans? Individuals lack the funds to pay for their schooling No collateral; uncertainty banks hesitant to provide loans Financing constraints reduced participation: not desired! Student loans (subsidised): - overcome financing constraint - shift net benefit of schooling (through subsidies)
Types of student loans Voluntary (universal) loans - government; all (fulltime) students Means-tested loans (income-tested; need-based) - government, HE institutions, banks Merit-based loans - institutions, banks Public versus private loans
Loans: characteristics Covering tuition costs and/or living expenses Amounts and number of installments Repayment conditions - mortgage type (fixed repayment period) - income contingent loans (flexible) Interest subsidies / repayment guarantees - who takes the risk? Loan remission / debt forgiveness (waiving debt) - based on performance - specific occupation (or area) - canceling debt at end of repayment period
Loans: Practices / experiences
Loans: practices Introduction of student loans - Australia, UK, Hungary, Poland, Slovenia, Hong Kong, Chile, Replacing grants with student loans - US, Netherlands, UK,... - decline in value of grants: CE-Europe, Public loans versus private loans - private loans in: France, Slovenia, Portugal... but not popular Repayment conditions: conventional / income contingent - IC: Australia, Chile, Hungary, South Africa and UK, - but not in Canada
Case studies England + Schotland Netherlands Sweden Finland Hungary Germany
United Kingdom (E + W) GOVERNMENT budget Student Loans Company Tax authorities loans repayments STUDENTS
UK: introduction of loans Introduction of top up loans in 1990 Voluntary loans next to means-tested maintenance grants Repayment conditions - mortgage type, 10 years repayment period, fixed installments - zero real rate of interest Gradual replacement of grants by loans - mid 1990 s: grants frozen, loans increased - 1999 all grants cancelled and only student loans available - but since 1998 tuition grants / waivers
UK: current loans As from 1999 income contingent loans, also tuition loans Voluntary but means-tested loans - poor students get full loans, rich students only 75% Repayment conditions - income contingent, repay 9% of all income over 10.000 / year ( 15.000 / year as from April 2005) - through tax authorities - zero real rate of interest Experiences - proportion of borrowers from 28% in 1990 to 81% in 2006 - amount of maintenance loans in 2007 3.500, tuition loan 2.900 - average debt in 2005 10.000 - support too little, students remain poor credit card debt; work - debt aversion, particularly low-income students (tuition + full loans?)
Schotland: : special case Since 2001 tuition fees as deferred graduate payment Student loans run through SLC (Glasgow) - complaints that it is too expensive administratively Proposals and plans to abolish deferred tuition payment as well as turn loans into grants (in 2008/2009)
Netherlands GOVERNMENT budget Information Management Group loans repayments STUDENTS
Student support (independent students) Free earning amount 12.916 p/y Total budget 892 Supplementary grant 228 Parental contribution 228 Tuition loan 128 Voluntary loans 280 Basic grant 256
Student support (living at home) Free earning amount 12.916 p/y Total budget 709 Supplementary grant 209 Parental contribution 209 Tuition loan 128 Voluntary loans 280 Basic grant 92
Netherlands: tendencies 450 400 350 300 250 200 150 100 50 0 1987 1992 1997 2002 2007 Basic grant Suppl. grant / parental contr. Loan
Netherlands: loans Covering part of living expenses and tuition costs Voluntary loans (up to 408 per month / 4.900 per year) - also possible to replace parental contributions with loans ( 228) - but: also all grants initially given as loans Repayment conditions - mortgage type (2-year grace period, 15-year repayment period) - means-test possible reduced repayments amounts (5% - 10%) - average debt around 12.000 (max up to 60.000) - all outstanding debt after 15 years forgiven Interest - students pay the interest rate on state loans (4.17% in 2008) Experiences - amounts of support too small - about 30% take up loans (but increased rapidly last years) - students work to increase living standard and to prevent borrowing - delays in study duration
Graduate debt and repayment scenarios Average debt in 2003 6.200 in 2005 7.500 in 2008 12.000 Total debt \ interest 2% 3% 4% 5% 5.000 45 45 45 45 10.000 64 69 74 79 15.000 96 103 110 118 25.000 160 172 184 196 40.000 257 275 294 314
Sweden GOVERNMENT budget CSN Swedish National board of Student Aid grants / loans repayments STUDENTS
Sweden: student support Grants and loans are given in a package - grants ( 69 per week); loans ( 131 per week) - students older than 25: additional loans ( 44 per week) - if earnings exceed 280 per week, support reduced Maximum # of weeks to get support: 240 (5 years) - maximum debt: 32.500 (or 42.500) Interest - students pay a low interest rate (4% in 2007)
Sweden: loans Repayment conditions: old system (1989-2001) - income contingent loans - repayments 4% of income - students maximised loans: interest higher than 4% most would not repay debt Repayment conditions: new system (since 2001) - mortgage type - 6 month grace period - 25 years of repayment (or until aged 68) - minimum repayment amount: 670 / year (or reduction to 5% of income) - in case of problems ask for lower repayment amounts - repayment per month, 3 months or per year Experiences - many students took up loans but reducing - lifelong debt burdens - students replace loans with income from work
Finland Support a mix of grants, loans and housing supplement - per month: grants 259, loans 300, housing supplement max 202 Repayment conditions of loans - bank loans from Finnish banks guaranteed by the government - interest, repayment and other conditions agreed between bank and student - student loan tax deduction: 30% tax deduction of all debt over 2.500 Experiences - proportion of borrowers around 40% - support too little, students massively take jobs
Hungary Since 2001 an income contingent loans scheme Hungarian Student Loans Company runs the system - lends money to students, issues credit lines from private banks - max amount is 1200 p/a (living costs 2400) - interest: Treasuray rate (7%) + 2% risk + 1% administration Repayment conditions - minimum monthly repayment (discipline) - first 2 years 6% of minimum wage - afterwards 6% of taxable income of 2 years before (HSLC receives income info from tax authorities) - default: after 6 months on borrowing black list Experiences - 36% of students take up the loans (150.000) - repayment equals 98,5% of scheduled repayments - administration costs around 1% - risk not equally spread yet - prepare for tuition fees
Germany BAFöG: 50% grants and 50% loans; for about 35% of students, all students indirect support New loans related to tuition arrangements: each Land its own mechanism Repayment conditions, for BAFöG loans - no interest during any period - 5-year grace period after graduation, 25-year repayment period - maximum debt kept at 10.000 - in case of good performance part of debt cancelled Experiences - proportion of borrowers limited (but obligatory if one takes a grant) - high public subsidies - very costly but still students strongly oppose to these loans - no borrowing culture yet
Some private loans via banks examples GOVERNMENT BANKS guarantee France / Slovenia loans Unfavourable conditions - high interest; short repayment period Not popular STUDENTS
Hidden grants in student loans Ziderman Shen, 2007
Debt and starting salaries Usher, 2005
Impact of tuition & support In general students are not very price sensitive except low SES students Student loans have an ambiguous position - they do not promote access that well - low-ses students indicate to be debt averse Non-financial factors are more important in student choice - parental education & income, gender, academic preparation Support often too little: students remain poor - credit cards, personal loans, part-time jobs - high private debts and study delays
Information / communication Students & parents often have poor information Danger negative perceptions: debt aversion & access problems! COMMUNICATION! Due to being uninformed, not interested or principally against student borrowing But this does not mean one does not attend higher education or that one does not take up student loans!
Wrap up: recommendations Large variation in loan practices Most loans systems are complex: keep it simple Most loans contain substantial subsidies: make visible Loans (+ other support) too small: substantial amounts Prospective students have poor information: communicate!
Address Thank You! www.utwente.nl/cheps