1 Student Loans in Europe Economic and Financial Issues Marianne Guille Université Panthéon-Assas Paris II International Conference Moscow June

2 Funding Higher Education in Europe Recent trends reveal rising costs and institutional austerity. Why ? A spectacular rise of students numbers and an extended period of financial stringency for governments which highly subsidize HE. In parallel, there was a growing recognition of the private benefits associated with the investment in HE (wage premium, better labour market prospects…). Private rates of returns to HE are always higher than real interest rates, often significantly. One response to this funding crisis is then to increase significantly the scale of private funding. How ? Increase of tuition fees and reform of student aid schemes : student loans programs.

3 Main Advantages of Student Loans Schemes To increase and diversify resource for HE (mixed results: private funding replaces/supplements public support, type of coverage : tuition fees and/or cost of living, low repayment rates …). To release students liquidity constraints : While students cannot easily afford to pay more (from lower income families, uncertainty, credit rationing), graduates in principle can. To improve equity (private/social returns to HE, traditional systems with low or no fees had not encouraged the participation of children from low-income families). To improve efficiency and responsiveness of HEI and students (incentives for HEI to be more cost-conscious service providers and for students and families to be more discerning consumers).

4 Student Loan Schemes in Europe Student Loan Schemes in Europe A clear but not general trend towards higher fees while needs- based support schemes are very different. A clear but not general trend towards higher fees while needs- based support schemes are very different. In half of the EC, mainly South, Mid-Western or Eastern EC, public student direct aid is rather low and still comprises no loan. In half of the EC, mainly South, Mid-Western or Eastern EC, public student direct aid is rather low and still comprises no loan. Six North or Mid-Western EC have developed publicly support student loans schemes : The part of the loan was about 33% of the aid in Denmark and the Netherlands in 2000, 50% in Germany, 75% in Sweden and Norway, 100% in the UK. Six North or Mid-Western EC have developed publicly support student loans schemes : The part of the loan was about 33% of the aid in Denmark and the Netherlands in 2000, 50% in Germany, 75% in Sweden and Norway, 100% in the UK. New forms of public-private partnership are emerging, particularly in Eastern EC : Government or Government Agency with commercial banks, support of the World Bank (Poland, Hungary, Bulgaria …) New forms of public-private partnership are emerging, particularly in Eastern EC : Government or Government Agency with commercial banks, support of the World Bank (Poland, Hungary, Bulgaria …) Commercial banks develop specific student loans programs. Commercial banks develop specific student loans programs.

5 Differences in Student Behavior and Social Role. Over 80% of students in the Nordic EC live away from home while in Southern EC over 60% live with their parents. Other EC are in between. Over 80% of students in the Nordic EC live away from home while in Southern EC over 60% live with their parents. Other EC are in between. The more students live independently, the more they are helped (Nordic EC), with the exception of the Netherlands. The more students live independently, the more they are helped (Nordic EC), with the exception of the Netherlands. The more they are considered young citizens investing in their future, the more the loan based aid is important. (Norway, Sweden, Iceland and the UK). The more they are considered young citizens investing in their future, the more the loan based aid is important. (Norway, Sweden, Iceland and the UK). When they are considered children in a family system, hardly any support is provided (Southern EC). When they are considered children in a family system, hardly any support is provided (Southern EC). Mid-Western EC are in between : financial aid to a large minority of needy students, depending on parental resources. Mid-Western EC are in between : financial aid to a large minority of needy students, depending on parental resources.

6 Other determinants Loan/Grant is also dependent on tuition fees and returns to HE. Loan/Grant is also dependent on tuition fees and returns to HE. As the lowest returns in Europe were received in the Nordic EC, Sweden (1989) and Norway ( ) decided to reduce the part of the loan to reduce the cost of the investment in HE. As the lowest returns in Europe were received in the Nordic EC, Sweden (1989) and Norway ( ) decided to reduce the part of the loan to reduce the cost of the investment in HE. The UK which were at the top of the returns’ scale decided in 1999 to increase tuition fees, abolish grants and provide only loans to students assuming that an increase in the cost of the investment will not reduce the enrolment in HE. The UK which were at the top of the returns’ scale decided in 1999 to increase tuition fees, abolish grants and provide only loans to students assuming that an increase in the cost of the investment will not reduce the enrolment in HE. A new reform introduces variable deferred fees covered by loans (up to €4,500) from 2006, but restores means-tested grants for students from low-income families : they could become reluctant to borrow because of the importance of graduates debt (on average €8,500 in 2002) and risk aversion, lack of experience in financial management, inadequate information… A new reform introduces variable deferred fees covered by loans (up to €4,500) from 2006, but restores means-tested grants for students from low-income families : they could become reluctant to borrow because of the importance of graduates debt (on average €8,500 in 2002) and risk aversion, lack of experience in financial management, inadequate information…

7 Criteria of Eligibility Differ. The age limit is more restrictive in the Netherlands (27 years) or in Germany (30) than in Sweden (45), in the UK (50) or in Denmark (no age limit). The age limit is more restrictive in the Netherlands (27 years) or in Germany (30) than in Sweden (45), in the UK (50) or in Denmark (no age limit). Part-time students are excluded except in Sweden or the UK. Part-time students are excluded except in Sweden or the UK. Means-tested criteria : Students’ independent income, parental income (except in Nordic EC) and/or spouse’s income. Means-tested criteria : Students’ independent income, parental income (except in Nordic EC) and/or spouse’s income. Students’ familial situation and way of living matter : living at home or independently, number of children, study location… Students’ familial situation and way of living matter : living at home or independently, number of children, study location… Performance conditions to apply or continue to receive the loan in most EC, performance-related grant in the Netherlands (converted into a gift or a loan according to the performance). Performance conditions to apply or continue to receive the loan in most EC, performance-related grant in the Netherlands (converted into a gift or a loan according to the performance).

8 Repayment Terms Differ. Two EC only have chosen income-contingent loans : In Sweden, debtors have to pay 4% of their income per year, in the UK 9% of the supplement of income earned above a threshold. Two EC only have chosen income-contingent loans : In Sweden, debtors have to pay 4% of their income per year, in the UK 9% of the supplement of income earned above a threshold. In the other EC : Mortgage-type loans. Repayment is not related to borrower’s income but generally comprises a period of grace varying between 1 and 5 years after the completion of studies. In the other EC : Mortgage-type loans. Repayment is not related to borrower’s income but generally comprises a period of grace varying between 1 and 5 years after the completion of studies. The cost of repayment varies significantly according to the main objective of student loan schemes (social/budgetary) : The cost of repayment varies significantly according to the main objective of student loan schemes (social/budgetary) : The level of interest rates : no interest in Germany, a zero real interest rate in the UK. In the other EC, interest is subsidized or reflect the true cost of government borrowing. The level of interest rates : no interest in Germany, a zero real interest rate in the UK. In the other EC, interest is subsidized or reflect the true cost of government borrowing. The length of repayment : Interest is charged from the date loan was paid out (except in Norway), loans have to be repaid within a maximum of 15 to 25 years or before the age of 65. The length of repayment : Interest is charged from the date loan was paid out (except in Norway), loans have to be repaid within a maximum of 15 to 25 years or before the age of 65.

9 The Proportion of Beneficiaries Varies. In the Nordic EC, almost all applicants received loan based aid at the end of the nineties which represented more than 60% of full-time students in Sweden and Norway, 50% in Denmark (Finland : 30%). The proportions of students receiving grants were higher (from 65% to 90% in Denmark). In the Nordic EC, almost all applicants received loan based aid at the end of the nineties which represented more than 60% of full-time students in Sweden and Norway, 50% in Denmark (Finland : 30%). The proportions of students receiving grants were higher (from 65% to 90% in Denmark). 65% in the UK (a proportion progressively close to that of the Nordic EC) 65% in the UK (a proportion progressively close to that of the Nordic EC) Less than 10 % in the Netherlands because of the performance- related grant (80% of students) and higher interest payments. Less than 10 % in the Netherlands because of the performance- related grant (80% of students) and higher interest payments. 18% in Germany (number of beneficiaries constant since 1971 when 40% of students received student aid). 18% in Germany (number of beneficiaries constant since 1971 when 40% of students received student aid).

10 Towards a European Loan Scheme ? Public loans : All students should be eligible to loans without parental income criteria and loan amounts should be large enough to cover all fees and living costs. Free fees and grants should be restricted to students from poor families. Public loans : All students should be eligible to loans without parental income criteria and loan amounts should be large enough to cover all fees and living costs. Free fees and grants should be restricted to students from poor families. Repayments : Repayments should be income-contingent and collected by income-tax authorities as in the UK because automatically tailored to ability to pay (less uncertainty) and more efficient for cost recovery (less default). Repayments : Repayments should be income-contingent and collected by income-tax authorities as in the UK because automatically tailored to ability to pay (less uncertainty) and more efficient for cost recovery (less default). Interest rates : Students should pay no real interest rate during their study and an interest related to government’s cost of borrowing after. Interest rates : Students should pay no real interest rate during their study and an interest related to government’s cost of borrowing after. Private loans : targeted to specific market segments at market conditions. Private loans : targeted to specific market segments at market conditions.