Winston Adams | Targeting dreams: higher education and student loans (Pt 2)
Much of the record of failure related to student loan financing schemes is because of problems and limitations - some of which are peculiar to low-income or less industrialised countries - that seem, at least in the short run, to be intractable that is, not solvable simply with smarter policies or better execution. Other challenges may be amenable to alternative policies and/or practices. Among the most serious problems and limitations are the following:
1. The high rates of unemployment and low-paying jobs in some countries among university graduates, making student loan repayments difficult (even with an otherwise well-conceived and well-administered loan programme).
2. The pervasive belief that higher education is, or ought to be, a public entitlement, that is, paid for by everyone, even if only relatively few participate and benefit.
3. The pervasive absence of trust, especially among students and potential student populations in many countries of government and of the university administrations.
4. The low rate of savings and general scarcity of private capital. This limits the supply of student loans to whatever the Government can make available. This puts student lending in competition with alternative direct governmental outlays rather than with alternative investments.
5. The absence of reliable and cost-effective systems for loan servicing and collecting. The design and implementation of student loan schemes can face bottlenecks along any one of the following dimensions: demand, funding and coverage, financial viability, and targeting.
Demand problems occur when for any reason, the availability of loans is not sufficiently known to students or when the financial products offered by the student loan agency are not attractive. Knowledge about student loans has two dimensions. First, students need to be aware of the existence and availability of the programme. Second, they must understand clearly what is involved in a loan (eligibility criteria, grace period, repayment obligations, interest rate, etc) in terms of responsibilities and obligations.
The attractiveness of any student loan scheme is determined by cultural factors such as attitudes towards borrowing and risk aversion, by the economic terms of the loans, and by the credibility of the student loan agency. Funding problems reflect constraints on the availability of financial resources to offer new loans and expand coverage.
Funding from the public budget is usually affected by the fiscal health of the country. The more enterprising student loan agencies or other financing institutions across the regions are able to tap funds from additional private sources. ICETEX in Colombia, FUNDAPEC in the Dominican Republic, and the Sonora State Student Loan Institute in Mexico, for example, have been successful in attracting private resources from companies and philanthropists, which are administered as trust funds.
The financial viability of any student loan scheme is affected by the degree of interest rate subsidy, the default rate, and the level of administrative costs. The default rate, in turn, is a function of the income situation of the graduates, the effectiveness of the collection mechanisms, and the type of repayment schedule applied (fixed payments versus graduated payments, and length of the grace period).
Some student loan institutions have a complicated system of exemptions that contributes further to the lack of financial viability. In Venezuela, for example, FUNDAYACUCHO offers three types of exemptions. Students with a high academic performance can have up to 15 per cent of their total debt reduced. Graduates who decide to work in the public service or in a public higher education institution are entitled to a 35 per cent discount. Finally, graduates who are never late on their loan payments can benefit from a 20 per cent discount after a certain period.
Targeting is the last category of potential problems. Targeting can become an issue if there is leakage, that is, when the social characteristics of the selected beneficiaries do not correspond to the planned distribution of recipients. Our own Students' Loan Bureau (SLB) in Jamaica, which was supported by a World Bank loan, was indeed also faced with this issue. It would appear that the income categories and ceilings used as eligibility criteria in the selection process had not been discriminatory enough. As a result, a higher-than-expected proportion of students from the richest quintiles were able to receive loans.
Improving the efficiency and financial viability of existing student-loan programmes while broadening their coverage is a major challenge. Despite the poor performance of many of the existing schemes, the recent experience of the World Bank, in support of student-loan schemes, reveals that it is possible to design and administer financially sustainable programmes if a number of basic conditions are respected. The following features have been identified by the World Bank as critical:
- Good information and marketing strategy to promote the student loan programme and ensure widespread awareness among eligible students and institutions;
- Transparent eligibility criteria to ensure that any subsidy element is targeted at the most deserving students (academically and socially);
- Close supervision of the academic performance of the student loan beneficiaries.
- A carefully designed interest rate and subsidy policy to protect the long-term financial, viability of the scheme.
- Efficient collection mechanisms, including an appropriate legal framework, to minimise default.
- Efficient institutional management of all key processes (evaluation and selection of beneficiaries, academic monitoring, loan collection, financial management), based on an adequate computerised management-information system.
Stable management team
Increased government intervention is required in the financing of higher education. Without public assistance, there will be adverse economic and social consequences: talented poor prospective students will be unable to finance the payment of fees, and this necessarily means both economic waste and the perpetuation of inter-generational inequalities. This has generally been accepted and has resulted in various forms of government financial assistance. Some countries choose to subsidise fully the costs of higher education, while others offer government-assisted bank loans to a proportion of potential higher education participants. It has been argued above that for reasons of equity and efficiency, these approaches have significant weaknesses.
Economic theory illustrates that conceptually, the preferred approach is income-contingent charging. An income-contingent loan approach requires that a government is able to do at least two things efficiently. First, individual students' incomes need to be recorded accurately over time. This requires a mechanism involving a unique income-identification system. Second, there has to be an efficient collection mechanism. That is, if there are simple ways for former students to avoid repayment obligations, income-contingent approaches will not work.
By their very nature, student loan institutions are faced with a perpetual dilemma. As instruments of equity promotion, they have an important social responsibility and need to be designed in such a way as to serve the funding needs of students from the low-income groups. As financial institutions, they are required to respect basic principles of financial viability to be able to continue to operate sustainably. These two inherently antagonistic objectives are difficult to reconcile and represent the fundamental challenge faced by any student loan scheme.
- Dr Winston Adams, JP, is group executive chairman of the University of the Commonwealth Caribbean, and first vice-president of the Jamaica Association of Private Tertiary Institutions.
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