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Student Loans Schemes: Criteria for Evaluation Adrian Ziderman Bar-Ilan University, Israel 21 September 2019

Main topics for discussion Rationale for student loans: alternative objectives Evaluating student loans Financial appraisal Successful targeting Issues in financing loans schemes 21 September 2019

The logic of loans policy Education is an investment in human capital Graduates have higher earnings potential Loans are repaid out of enhanced earnings Even with repayment, higher education remains a good investment 21 September 2019

Five major loans scheme objectives Budgetary - no university expansion      University system expansion Social Manpower needs Student assistance 21 September 2019

Higher Education Budget Allocations Government Budget Budgetary Allocations Students No Fees (or minimal fees) Universities 21 September 2019

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 21 September 2019

Higher Education Budget Allocations, with Cost Sharing Government Budget Budgetary Allocations Loans scheme Repayments Loans Students Fees Universities 21 September 2019

Loans scheme objectives 2 University system expansion Generate additional tuition fee revenues to (partially) finance expansion of the public university sector 21 September 2019

Loans scheme objectives 1 & 2 Expectations Fee increases at public universities Augmented university funding Non subsidized loans 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 21 September 2019

Loans scheme objectives 3 Social   Loans targeted on needy students Disadvantaged groups etc 21 September 2019

Loans scheme objectives 4 Manpower needs Meet specific occupational/regional manpower needs 21 September 2019

Loans scheme objectives 3 & 4 Expectations No fee increases at public universities No increase in university funding Loans are subsidized Target group defined Alternative Policies   Social Assist needy students Disadvantaged groups Manpower Occupational/regional manpower 21 September 2019

Loans scheme objective 5 Expectations No fee increases at public universities No increase in university funding Non subsidized loans No target group Alternative Policies   Student Assistance Ease financial burden during study Financial independence for students 21 September 2019

Loans scheme evaluation Scheme to be evaluated in context of major objective Objectives 1 and 2 (budgetary): financial appraisal Objective 3 (social): success in reaching target groups Objective 4 (manpower): increased enrollment/employment in priority areas Objective 5 (student assistance): survey methods 21 September 2019

Loans scheme evaluation Particular attention to: Objectives 1 & 2: financial evaluation Objectives 3: reaching target groups 21 September 2019

Measuring financial performance Loan Repayment: How much of a loan is a borrower required to repay?   Loans Recovery: How much of loans scheme total outlays are recovered? 21 September 2019

Focus: the Individual borrower Low repayment ratio stems from: Below-market rates of interest Interest-free study and grace periods Repayment in nominal terms (not taking account of inflation) Built-in subsidies 21 September 2019

Focus: the Loans Scheme Reasons for Low Recovery Ratio Subsidized Loans (built-in) Non-Repayment (“default”) Administration Costs 21 September 2019

The Loans Scheme The Individual Loans recovery with default and administration costs Loans recovery will 20% default Loan repayment Loan Size 21 September 2019

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 Jamaica 30 Bolivia 30 Denmark 38 Mexico 39 Japan 40 Peru 40 Australia 43 United States (GSL) 47 Finland 48 Guatemala 50 Norway 52 Colombia 53 Hong Kong 53 Dominican Republic 57 Canada (Quebec) 63 Barbados 67 Sweden 67 21 September 2019

Substantial subsidy justified? Justification for Subsidized Loans Substantial subsidy justified? Loan Scheme Objective No Budgetary objectives University system expansion Yes Social objectives (equity/access for the needy) Yes (?) Manpower needs Student assistance 21 September 2019

C B A D Targeting the Poor Poor Non Poor Income Ceiling Students - Loan Recipients Students – Non Recipients Non School Population A D 21 September 2019

Loans subsidies Do they achieve equity objectives? Do loans reach target groups? Are the very poor excluded? Do the non-poor receive loans? Is loan size large enough to cover costs? Do loans encourage access Do they compromise the financial viability of the loans scheme Would focused grants make more sense? 21 September 2019

Financing loans schemes Capital provision Interest rate subsidies Risk-bearing 21 September 2019

Provision of loan capital No additional capital required with burden shifting 21 September 2019

Higher Education Budget Allocations, with Cost Sharing Government Budget Budgetary Allocations Loans scheme Repayments Loans Students Fees Universities 21 September 2019

Provision of loan capital No additional capital required with burden shifting Loans funding usually required – from government Continuing financing burden, reduced overtime with loan repayments Other funding sources: banks financial institutions (existing funds) 21 September 2019

Interest rate subsidies Interest rate in virtually all student loans schemes are below commercial interest rates Judgement: non-subsidized loans impose too heavy a repayment burden Interest subsidy borne by government Where loans capital is provided by banks, government subsidizes the interest rate Some non-subsidized bank loans not in receipt of interest subsidies – only for the better off 21 September 2019

Who bears the risk? Inability of most students to provide loan collateral Dubious value of parental guarantors Government usually acts as guarantor, both in state and commercial bank loans schemes S.E Asia exceptions: Chinese commercial scheme Hong Kong non-subsidized scheme 21 September 2019

Financing Loans Schemes – Functions and Agents Financing Functions Country (loans scheme) Risk-bearing Loan subsidies Capital provision Banks, Government State-owned commercial banks China (subsidized) Parental assets None Commercial banks China (commercial) Government, Parents Hong Kong (subsidized) Hong Kong (non-subsidized) Banks Korea (MOE) Government** Korea (Government employees) The Philippines (SNPL) The Philippines (Region V) University, Co-signatory The Philippines (Centres of Excellence) Thailand 21 September 2019

End of presentation 21 September 2019