Loans scheme objectives 1

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Economics of Higher Education Program
Student Loans Schemes International Perspectives
and Lessons for Israel
Adrian Ziderman
Bar-Ilan University, Israel zidera_at_mail.biu.ac.il
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Background

• Rapid expansion of tertiary education, worldwide
• Leading to
• Heavy burden on national budgets and
  under-financed university sectors
• Failure to achieve objective of increasing
  access of the poor and disadvantages groups
• Can student loans help?

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Research objectives
Identify the objectives to be served by the
introduction of a government-sponsored student
loans scheme in Israel To review the rich mosaic
of international practice of loans schemes,
especially in OECD countries Identify best
practice in the context of its applicability to
Israel Develop alternative loans scheme models
for Israel, in the context of higher and
differentiated tuition fee regimes Run
simulations of alternative loan scheme scenarios,
to examine their feasibility under different
assumptions relating to Loans entitlement Loan
size Loan conditions (interest rates, grace
periods, repayment method) Default
levels Administration costs
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Some specific issues
How might the scheme be funded? Loan
conditions, especially relating to level of
built-in subsidies Conventional mortgage-type
vs. income-contingent repayment Repayments
collection mechanism self-collection vs. agency
collection Access of low socio-economic and
disadvantaged groups Organizational framework
institutional roles
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Main topics for discussion today
Rationale for student loans alternative
objectives Three specific issues Funding
sources Repayments collection Measuring
financial performance Student loans for Israel
the Free to Study program
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Information base
Learning from international experience Illustrat
ions from S.E Asia case studies (UNESCO
project) Western Europe Selected other
countries Pitfalls of institutional transfer
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Loans schemes - country case examples
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Asian Case Studies General Description
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Five major loans scheme objectives

• Budgetary - no university expansion     
• University system expansion
• Social targeting
• Manpower needs
• Student assistance

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Higher Education Budget Allocations
Government Budget
Budgetary Allocations
Students
No Fees (or low fees)
Universities
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Loans scheme objectives 1

• Budgetary objectives - no university
  expansion     
• Generate income to maintain enrolments and
  output/quality, in response to rising university
  unit costs
• Funding replacement response to reduction in
  overall government spending, including education
• Funding replacement response to reallocation of
  public educational budgets, from universities to
  other sub-sectors

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Higher Education Budget Allocations, with Cost
Sharing
Government Budget
Budgetary Allocations
Loans Fund
Repayments
Loans
Students
Higher realistic fees
Universities
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Loans scheme objectives 2

• University system expansion
• Generate additional tuition fee revenues to
  (partially) finance expansion of the public
  university sector
• (University system expansion via growth of
  private universities)

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Higher Education Budget Allocations, with system
expansion
Government Budget
Budgetary Allocations
Loans Fund
Repayments
Loans
Students
Realistic fees
Universities
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Loans scheme objectives 1 2
Expectations Fee increases at public
universities Augmented university funding Low
level of subsidy No target group? Alternative
Policies

• Budgetary objectives    
• Rising university unit costs
• Reduced overall government spending
• Reallocation of public education budgets
• University system expansion
• Finance expansion of public university sector

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Cost-Sharing country examples
Australia (HECS) England Wales /
Scotland New Zealand Netherlands
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Four Phases in the Movement towards Cost-Sharing
in England and Wales

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Cost-sharing How have loans affected access of
the poor?
Lessons from Australia (HECS) Proportion of
lower socio-economic groups has not fallen But
no proactive steps to enhance access of poor UK
research results less favourable (Callendar, etc)
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Loans scheme objectives 3

• Social targeting (increasing access)
•  
• Loans targeted on lower socio-economic groups -
  needy students, disadvantaged groups, etc
• (Cross subsidization grants for needy students
  financed by income from higher tuition fees)

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Social Targeting country examples
China The Philippines Hong Kong Thailand
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Assisting the poor five key conditions for
increasing access of lower S-E groups
Effective eligibility and screening
criteria Pro-active targeting Adequacy of loan
size Favourable loans conditions Unifying
grants and loans policy
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Barriers to access not only financial
Multiple barriers to access Financial poverty
vs. informational poverty (Barr) Prior action
to better inform and raise aspirations Complemen
tary measures by other institutional players
(including universities)
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• Direct subsidies are present in most schemes, but
  these may need to be sizeable to encourage access
  of lower S-E groups
• The part of the subsidized loan that is not
  repaid is a gift to the borrower a hidden
  grant (Johnstone)
• Grants are more effective than loans in
  increasing groups access of lower S-E
• When the hidden grant is very large, it may be
  preferable to provide outright grants

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Loans versus Grants
Commercial loan (full repayment with interest)
Grant (no repayment)
Subsidized loan/ Hidden grant
Repayment ratio
0
100
75
PV repayment stream / PV loan received
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Loans scheme objectives 4

• Manpower needs
• Meet specific occupational/regional manpower
  needs

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Loans scheme objectives 3 4
Expectations No fee increases at public
universities No increase in university funding
Loans are subsidized Target group is
defined Need for support for tuition and living
expences (Social)

•   Social
• Assist access of lower S-E groups
• Manpower
• Occupational/regional manpower

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Loans scheme objectives 5

• Student assistance
•  
• Ease student financial difficulties during study
  
• Improve students financial independence

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Loans scheme objective 5
Expectations No fee increases at public
universities No increase in university
funding Low level of subsidy No target
group Often covers living expences only (no
fees)

•   Student Assistance model
• Ease financial burden during
• study
• Financial independence for students

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Student assistance country examples
Denmark Norway Sweden Canada ?
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Student financial independence
Differing attitudes and practice between
Northern Europe (Nordic countries) and most other
European countries 1. Family responsibility
students are regarded as dependent on parents.
Extent of support determined by family income.
But parents are not legally required to make the
designated parental contribution. In Austria,
Germany, UK etc 2. Student financial
independence student support entitlement is
based on student not parental economic
circumstances. In Nordic countries (tuition
free, loans and grants for living expences),
Netherlands (loans for tuition and living
expences)
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Loans scheme coverage and purpose country
examples
current scheme new scheme
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Some lessons from international experience
   Student loans can work well, but need to be
carefully designed, debated and implemented
Objectives must be clear (is major emphasis on
cost recovery, equity or other?) Student loans
may serve a central role in policies for
enhancing university income through increased
cost-sharing (raised student fees) Given tight
government budgets, non central budget sources of
loans funding may need to be explored Loans
recovery may be lower in practice than is
expected avoid unwarranted loan subsidies
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Some lessons from international experience
   Explicit subsidies (grants) are more effective
than hidden grants, in encouraging access of
low S-E groups Student loans should be combined
with focused grants and scholarships, to assure
access of these groups
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Provision of loan capital

•    
• Direct financing by the government - usual case
  
• Increased financing burden on government, which
  is reduced overtime with loan repayments
• Hong Kong, UK, Australia, Lesotho, Canada, etc,
  etc
• Commercial Banks - Government guarantees
• Finland, China, Korea (MoE), Canada (formerly)
• Financial institutions (existing funds)
• Philippines (formerly), Korea (various schemes)
  
• Borrowing (securitization) planned for
  Thailand

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Three Phases in Financing the Canadian Student
Loans Program

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Loans repayment collection alternative scenarios
Self collection National loans agency
Commercial banks
Universities Ministry of
Education Agency collection Banks
Taxation authorities Social
security organization
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Income-contingent loans (ICL)
The conventional student loans regime is a
mortgage type loans scheme ICL introduced in a
few countries, following success of Australian
scheme NZ, Sweden, S. Africa, Chile , England
Wales Two aspects I. A system of loans
repayment II. A mechanism for loans
collection I Clamed advantages - risk
aversion default Requires a means of
identifying individual incomes II If efficient,
mechanism may be used for mortgage type loans too
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• In all cases, loans scheme constitutes a
  continuing charge on government
• Evidence

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• Loans Recovery
• How much of loans scheme outlays (loan
  disbursements plus administration costs) are
  recovered?
•  
• Recovery Ratio
• PV receipts from repayments / PV total outlays
•  

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Loan Recovery Ratio, Selected Countries (1992
estimates)
Country With default
and
administrative costs
Country With default and

administrative costs
Kenya -3 Venezuela -8 Chile 18 Honduras
27 Indonesia 29 Brazil 29 Equador 30 Jamaic
a 30 Bolivia 30 Denmark 38 Mexico 39 Japan
40 Peru 40
Australia 43 United States (GSL) 47 Finland 4
8 Guatemala 50 Norway 52 Colombia 53 Hong
Kong 53 Dominican Republic 57 Canada (Quebec)
63 Barbados 67 Sweden 67
Source Ziderman and Albrecht (1995)
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• Built-in features
• Subsidized rates of interest
• No interest payment during study and grace
  periods
• Repayment in nominal terms
• Non-Repayment (default)
• Administration Costs
• Forgiveness

Reasons for Low Recovery Ratio
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Loan Repayment and Recovery Ratios SE Asia
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Free to Study loans program ((???? ?????
Background Outline of the scheme Questions/doub
ts Comments for discussion
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Free to Study outline of the scheme
Tuition fees raised from 8,600 to 10,000
shekels Delayed payment tuition fee13,500
shekels Repayment 3.5 of annual earnings,
until loan is repaid Exemption for earnings
below average wage Funded by issue of bonds,
backed by government guarantees Repayments
collected by the National Insurance Institute
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Free to Study loans program
Questions/doubts What are the objectives of
the scheme? Will it raise extra resources for
higher education? Will it increase access of
lower socio-economic groups? Costs of
operating the scheme overt, hidden Repayments
collection A misreading of Australian/internatio
nal experience
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Free to Study loans program
Questions/doubts What are the objectives of
the scheme? Will it raise extra resources for
higher education? Will it increase access of
lower socio-economic groups? Costs of
operating the scheme overt, hidden Repayments
collection A bird in the hand is worth more
than. A misreading of Australian/international
experience
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Comments for discussion on Free to Study
Seems to be concerned more with social targeting
/ student assistance than with cost
sharing Tuition fees restored to pre-Weinograd
levels, enhancing university income by only about
3 percent (250 million shekels) Government-borne
interest subsidy and repayment default costs are
estimated at about 250 million shekels!
Repayments collection costs (Bituah
leÚmi)? Effect on access of lower S-E groups
measures not enunciated Is it wise to defer all
of the tuition fee? A bird in the hand is
worth....
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Cost-Sharing in Australia

Higher Education Contribution Scheme
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Applying lessons of international experience
Policy formation and reforms should take account
of available lessons from a wide range of
international experiences (what has worked well
and under what conditions, mistakes to be
avoided) Pitfalls of instant institutional
transfer across countries, replicating successful
practice in a particular model
country. Current plans to adopt ICLs in
Thailand, closely based on HECS, unlikely to be
successful. Problem of appropriability
(McFarland) The more eclectic approach to ICLs
adopted in England and Wales offers greater
promise of success
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End of presentation