Student Loan Programs Alternative Financing For Higher Education Harry Anthony Patrinos April 1999

Benefits of Education u Returns to education u Returns to higher education ï Productivity ï Government revenue (taxes) ï Externalities ï Private ï Social

Financial Problems of Higher Education u Overcrowding-declining quality u Growing demand-limited access u Limited resources è Need for alternative sources of finance

Need for Additional Resources u Government budget-limited u Efficiency gains, savings u Diversify resource base with external funds

Generating Funds for Higher Education 1.Charge tuition 2.Reduce students' living allowances 3.Private sector development 4.Student credit 5.Graduate tax

Generating Funds for Higher Education (Cont’d) 6.Work-study or national service programs 7.Business sponsorship of students 8.Consultancy, applied research 9.Sale of goods and services 10.Private donations

Need for Additional Resources u Government budget-limited u Efficiency gains, savings u Diversify resource base with external funds

Need for Additional Resources u Government budget-limited u Efficiency gains, savings u Diversify resource base with external funds è Primary beneficiary: students

Private Funds u Family resources u Student earnings u Students’ future earnings

Cost Recovery u Increase efficiency u Enhances equity u Expands source of revenue

Equity Issue u What if qualified students cannot pay? Student credit

Student Credit u Demand-side – Risks to borrower u Supply-side – Risk to lender u Information risk – Students know likely outcomes, lenders do not – arts or arbitrage (Barr)

Student Loans u Mortgage-type: specified time period, fixed payments u Problems Ô Harms access Ô No additional resources for university Ô Costly Ô Defaults Ô No private funding

Alternative Income contingent student loan

Income Contingent Student Loan ï Enables students to defer payments until they are working ï Allows needy access to higher education

Reforming the Funding System u Share costs u Minimize deterrent effect on poor u Benefit adults and young u Income contingent repayments u Payments equal cost of loan u Payments over lifetime u Minimize default u Loan not public expenditure

Improving the Performance of Deferred Payment Programs u Student loan programs should be targeted u Hidden subsidies limited u Likely pattern of graduate earnings taken into account u Program management by banks

Student Loan Programs Alternative Financing For Higher Education 30 April 1998