Solving the SLB dilemma
Kofi Nkrumah-Young, GUEST COLUMNIST
The Students' Loan Bureau (SLB) was established to provide financing for students of higher education in Jamaica. In 1995, through a loan from the World Bank, US$27 million was provided as the capital base for the revolving student-loan scheme.
Since then, there has been no major injection of capital to that fund. Small amounts, however, have been provided to fill short-term gaps. In 1995, the tertiary-student enrolment was approximately 21,000 and the average fee charged was about J$25,000 per annum.
In 2010-11, according to the Social and Economic Survey Report (2012), the tertiary-student enrolment was 68,993, a growth of 228 per cent. The average fee charged, based on a composite of the major universities in Jamaica, was approximately J$382,000 per annum in 2011.
Both population and fees have increased tremendously, yet the fund level at the SLB has made no commensurate growth. It is little wonder then that the SLB is currently unable to provide the funds necessary to pay the tuition fees for the number of students it has approved for loans.
PROBLEM OF UNDERFINANCING
The SLB also has a delinquency problem, but it must be emphasised that the main cause of its inability to fund the current demand is not delinquency but undercapitalisation. This is determined from an assessment of the loan portfolio and the delinquency and demand levels.
The loan portfolio, according to the 2011 figures of the bureau, stood at J$6.4 billion. Of this amount, J$3.6 billion fell in the moratorium category, i.e., that portion not scheduled for repayment. This leaves an amount of J$2.8 billion scheduled for repayment; however, the need was J$4.2B. Therefore, if the repayment was on schedule, there would be a shortfall of J$1.4 billion. That means J$2.2 billion of the portion slated for repayment was more than 90 days past due, giving a delinquency rate of 78 per cent.
The conclusion can, therefore, be made that the funding problem is due to undercapitalisation, and the delinquency has exacerbated funding problems, instead of causing it.
It is also opined by the SLB that the rate of delinquency is linked to unemployment, the culture of entitlement, and the high repayment resulting from the high cost of the loans.
In addressing the capitalisation problem, the following were considered:
1. Financing higher education is a national good.
2. There is currently a shortfall in the capital base of the SLB fund, primarily because of the growth in enrolment at the tertiary level.
3. Low-cost sustainable funding needed so that Jamaica can access funding at interest rates comparable to their counterparts in the English-speaking countries of the United Kingdom, United States and Canada.
4. International Monetary Fund conditionality may prevent further government borrowing at this time.
5. The current cost of borrowing from the SLB is too high, resulting from the capitalisation of the moratorium interest and insurance cost.
6. Borrowing from the commercial banks and credit unions in Jamaica requires collateral in order for them to manage their risk. Also, these institutions are unable to provide a moratorium on repayment during the period of study.
7. The requirement for collateral would make it untenable to individuals from poor backgrounds or the low-income sector.
The above assumptions suggest that the solution lies in a source of sustainable funding that would not impinge on the Consolidated Fund, or increase the debt capacity of the country.
I, therefore, propose that we implement a Higher-Education Participation Scheme modelled off the National Housing Trust (NHT) Act. This should lead to a replacement of the current education tax. The amounts derived from the contribution should be used to capitalise for the revolving student-loan scheme and the education be absorbed into the income tax (PAYE), thereby reflecting the reality that it is an income tax.
How the scheme would work:
1 Jamaican citizens would be required to contribute a portion of their salary to the fund:
2 The contribution would be repayable with interest after seven years (similar to the NHT scheme) and, in effect, would make the contribution a loan rather than a tax.
3 Employers would also be required to make a non-refundable contribution to the scheme, and in this regard that would serve as a tax, thereby ensuring that the employers who benefit from the educated employee contribute to the cost of their benefit.
4 Students of approved higher-education institutions would be able to access the fund as a source of financing their education.
5 The amounts borrowed would not be limited to tuition but extended to cover learning materials and accommodation expenses. Being a loan, it would ensure payback by those who would benefit from the system.
6 The repayment amounts would be income contingent. As such, the amounts would be determined by the salary level of the beneficiary.
7 In the event of unemployment, repayment would be suspended until the beneficiary has joined or rejoined the labour market.
8 The matter of the capitalisation of the interest during the moratorium period, which increases the effective cost to the student loan, would also cease.
BENEFIT OF THE APPROACH
This new method of funding higher education would have the following benefits:
1 The contribution would be refundable, and hence would not be an additional tax burden on the citizens.
2 The seven-year period that contributors would have to wait before being refunded would provide the cover needed for the moratorium study period where the beneficiaries are unable to repay.
3 The sustainability of the funding would lie in the continuous contribution, as well as the repayment amounts.
4 Two of the causes of the high rate of the delinquency of students' loans, namely unemployment and the high repayment amounts, are dealt with in this scheme. These are treated by the income-contingent nature of the repayment.
The above proposal is intended to provide a long-term solution to the problem; however, the current situation needs to be addressed as well.
In this regard, I propose that consideration be given to allowing the commercial banks to use a portion of the cash reserves being held at the Bank of Jamaica to provide the temporary solution. Currently, those amounts are unused and represent non-earning funds to the commercial banks.
Dr Kofi Nkrumah-Young is associate professor, education financing; and VP, planning and operations, UTech. Email feedback to firstname.lastname@example.org.