Monday, March 18, 2013

Funding Tertiary Education

From the East Asia Forum, Bruce Chapman on the future of student loans (excerpt):

Funding tertiary education in Southeast Asia and beyond

In recent decades Southeast Asian countries have simultaneously enjoyed rapid economic growth and a significant expansion of the higher education sector. But many countries in the region are finding it difficult to pay for this expansion of their universities.

This obstacle can be traced directly to problems with student loan systems, which in many countries either do not exist or have high default rates and/or major implicit interest rate subsidies...

...The first is that in the event of high student-loan default rates, which are almost always the case, the public sector bears the cost; in some countries the default rates are so high that the loans are effectively government grants...

...The second issue is related to the first. If governments didn’t subsidise student loans then graduates would have to use a significant proportion of their income to repay unsubsidised loans. This proportion is a critical phenomenon known as the ‘repayment burden’.

Repayment burdens for unsubsidised student loans in countries with low graduate incomes are extremely high, especially for the relatively poorly paid — say, the bottom 20 per cent of all graduate earners in the country...

...These high repayment burdens are associated with three major problems: first, a significant minority of graduates have to reduce expenditure in many areas to extremely low levels in order to meet their loan repayments; second, some of the student debtors will default on their repayment obligations because their incomes are too low — this affects their credit reputation and capacity to borrow for other purchases (such as a house) in the future; and third, when students default on their loan repayments, governments have to pay the loans, reducing the capacity of the public sector to provide government services, or implying a need for higher taxation.

There is a solution to these problems. ‘Income-contingent loans’ allow student debtors to repay their obligations depending on their future incomes. The Australian HECS model operates exactly like this, and there are now other countries that operate student loan systems in the same way: New Zealand, South Africa, Hungary, England and South Korea, for example. A number of countries, including Chile, Malaysia, Thailand and Colombia, are exploring the feasibility of introducing income-contingent loans, and in December 2012 a bill was introduced to the US Congress aimed at removing the current student loans programs and replacing them with income-contingent loans.

But can countries with less developed income tax systems, such as Indonesia, Vietnam, the Philippines, Malaysia and others, institute income-contingent loans systems that will operate effectively? After all, what is necessary on this area of public policy are institutions with the capacity to collect the repayments depending on graduate incomes. Before they can set up income-contingent loans, Southeast Asian countries will require accurate information and effective tax collection mechanisms.

This isn’t something to satisfy those hankering for “free” education, but income-contingent loans at least addresses the affordability problem. I’m not going to pretend this is anything like a satisfactory solution, because it does nothing for the fiscal aspects of funding tertiary education – adjusting loan repayments to income levels might make it easier for borrowers to repay, but it also lengthens repayment periods and thus increasing the overall fiscal burden.

In all honesty, I can’t think of any good solution that isn’t (1) expensive; and/or (2) screws up student incentives.


  1. I'm not sure that the Australian HECS system can be implemented in Malaysia due to cultural reasons. Australia has culture that is much more tolerant of socialist policies (labour government and all), I've bounced some ideas off my Malaysian friends and they've mostly reacted with disbelief.

    In any case, HECS was never meant to break even or be income positive. (in response to your comment about it lengthening the repayment period and increasing fiscal burden). This is just based on my knowlege of the typical HECS repayment schedule versus cost of education in Australia. It's just a token sum meant to show that degree holders are doing their part in repaying the government for providing them tertiary education. It's the same with Malaysia, the tuition fees paid at public universities aren't representative of the true cost of providing that education either. Bear in mind that Australia has more public universities as a % of the whole compared to Malaysia, who has more private education providers.

    But! Given how high marginal tax rates are in Australia, the government would be income positive anyway even if it didn't charge degree holders anything for education.

    Marginal rates are as high as 57% once everything is factored in for top income earners like dentists, I had a friend who managed to hit the top bracket in his first year out of university.

    I suppose this demonstrates how great the return to society is on education - the government doesn't have to charge a cent on it to make back all the cost in lifetime taxation.

    The question is, what is the optimal level of education to supply, it's a case of rapidly diminishing marginal returns. An oversupply situation like the US (caused by, in my humble opinion, the explosion of education lending after the market was deregulated, as well as predatory and manipulative practices by those involved selling loans...) which leaves 50% of graduates working in non-degree required jobs is a terrible waste of societal resources.

    A lot of it has to do with our aspirations for a highly educated society - where 100% of people are university educated and white collar workers - which doesn't match up with reality where only about 30% of people in any given society are going to be white collar. The solution really is to ensure that blue collar work is well respected and paid well, but that's another topic altogether...

    1. Aetherfox,

      Yup, fully agree with your comments, especially that last paragraph. Sometimes I wonder at people's expectations.

      Just some info on the Malaysian situation - the current tertiary enrollment rate is below 30%, but actual graduation rates are below 20%. Or so I've been told - I haven't been able to verify the latter. The actual proportion of graduates in the work force is only around 15%.

      So we are nowhere near a situation of over-supply as yet. Demand for graduates - qualified graduates with appropriate skills, that is - remains firm.

      Rather than trying to fully fund existing and future students within the existing system, on balance I'd prefer to look at expansion of access to tertiary education for more students, achieve universal pre-school education, and solve the problems at primary and secondary levels.

      That makes more sense to me than fully funding existing students - there's no marginal benefit to it, either to the economy or to the government. In fact, "free education" might have the perverse incentive of reducing student effort.

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