Wellington Group Exchange Session G: Financial Crisis – What does this mean for Higher Education? Reflections on Student Loan Schemes Bruce Chapman Crawford School of Economics and Government Australian National University

Outline 1Why Loans Schemes are Needed 2The Differences Between Loans Schemes: Bank Loans with a Government Guarantee 3The Differences Between Loans Schemes: ICL 4The Critical Role of Risk Management in an Uncertain World 5The Spread of ICL 6Loans Schemes in Trouble: Mortgage Based 7Conclusion

1Why Loans Schemes are Needed  Market failure in an uncertain and risky world: –human capital investment is uncertain (not finish, wrong subjects, future labour market) –no collateral for a bank –Government intervention is needed

3 Bank Loans with a Government Guarantee  Solves the bank risk problem  Provides finance easily  But: student risk remains  And: repayment hardship exists

Bank Loans and Student Default Risk

4Advantages of, and Problems with, ICL  Provide consumption smoothing  Provide insurance against default  Allow decreases in government expenditure  BUT, major design issues: adverse selection (big) and moral hazard (smaller)  Collection, collection, collection

5The Critical Role of Risk Management in an Uncertain World  Understanding government as a risk manager: the Moss contribution  ICL as a risk management tool  The pervasiveness of uncertainty: the current financial crisis the best example

6The Spread of ICL  Yale, 1974 (discontinued)  Australia, 1989, extended in 2001, 2005 and 2007  New Zealand, 1991  South Africa  Chile 1994  US (sort of), 1994  UK, 1997, extended 2007  Hungary, 2001  Ethiopia, 2001  Thailand, 2007 (suspended)  Under active consideration in Israel, Palestine, Colombia, Germany and Ireland

7Loans Schemes in Trouble: Mortgage Based  Defaults will Increase with Mortgage based systems  No defaults with ICL  Countries in Relative Trouble: the US and Canada  Countries more protected: NZ, the UK and Australia

Conclusions  Market failure means that student loans schemes are needed  Bank loans solve half the problem only  ICL are a risk management instrument  There has been a significant international reform with the spread of ICL  High financial instability a problem for mortgage based systems