International Higher Education, Spring 2002
Student Loans: A Slippery Lifeline
Burton
Bollag
Burton Bollag is an international correspondent for the Chronicle
of Higher Education. Address: Chronicle of Higher Education, 1255 23rd St. NW,
Washington DC 20037, USA.
But student-loan programs, difficult to get right even in the United States
where they have been around since 1958, are proving even more prone to failure
elsewhere. Three of the worlds most populous countriesChina, Russia,
and Indiahave tried to start loan programs in the past two years, but
the only one that could be called operational, in China, is plagued by problems.
In some countries, programs have been run so inefficiently that administrative
costs have eaten up as much as a quarter of the money available for loans. Elsewhere,
little of the money lent out was recovered, because few graduates bothered to
repay their loans, or governments charged students such low interest rates that
the loans ended up functioning largely as grants. Loan programs exist today
in some 60 countries, but in many nations they reach only a small share of the
young people who need them.
Finding the Right Balance
The trick is to find a balance between providing subsidies to needy students,
and making loan programs financially sustainable, says Jamil Salmi, deputy
director for educational policy at the World Bank, which is currently helping
about a dozen countries establish or strengthen loan systems. Loans may be intended
to reduce the pain of rising fees, but that doesnt mean students are always
happy about them. Loans put people in a trap, says Jacob Henricson,
chairman of the National Unions of Students in Europe, known as ESIB. If
you dont have a very large salary, youre going to have problems
repaying.
In Europe, with the exception of Britain, public higher education systems are
still free or very cheap, and many governments provide students with stipends
for living expenses and study materials. But as enrollments continue to climb,
the stipends are beginning to come as loans, instead of grants. Henricson, a
political science student at the University of Stockholm, says that with Scandinavias
high living costs and expensive imported textbooks, it is not uncommon for Swedish
students to graduate $25,000 in debt.
Pressure from students and their families to make borrowing for college cheap
leads to one of the thorniest problems policymakers facehow much to subsidize
interest rates of loans. A high subsidy, with students charged low or zero interest,
means that, due to inflation, students end up paying back only part of the value
of the money they borrow. Nicholas Barr, a professor of economics at the London
School of Economics and Political Science, says that when subsidies exist they
unfairly benefit the middle class. Students usually come from the middle or
upper middle classes and can afford to pay back loans at close to commercial
rates, he argues. Without subsidies, loan programs are cheaper for the taxpayers,
and more money can be made available to more students. Special assistance can
then be provided to students from poor backgrounds, or graduates who go into
low-paying but socially beneficial professions. But the middle class has considerably
more political clout than the poor, Barr says, and policymakers often give in
to their demands for cheaper loans for all.
That has been the case in Britain for the last decade. Interest on student loans
has been kept so lowgenerally equal to the inflation ratethat the
government has gotten back only about half of the value of the money it has
lent out. Now there are strong demands to reduce the interest rate subsidy and
give more help to those in greatest need.
Sharing the
Burden
One method for spreading out students debt burden that has attracted
international attention is Australias national loan system, the Higher
Education Contribution Scheme. Repayment is pegged to a graduates income;
repayment starts when he or she is earning at least $12,000 per year, and is
set at 3 to 6 percent of his or her income above that. So low earners pay back
smaller amounts, but for a longer time. Another feature of the program is that
administrative costs are kept down by piggybacking on the income-tax system.
Payments are billed as a surcharge to income taxes and are generally deducted
by employers.
Yale University tried another approach to promoting social equity in the 1970s.
Some view the program as having been an embarrassing flop, others as a noble
but flawed experiment. The World Banks Salmi says it illustrates
how the implementation of a theoretically sensible and generous concept turned
into a nightmarish adventure. Under Yales Tuition Postponement Option,
graduates had to repay yearly 0.4 percent of their salary for each $1,000 they
had borrowed. (Tuition was considerably lower then.) Each borrower had to continue
paying until the debt of their entire graduating class was repaid. The program
unraveled when high-earning graduates realized they would have to repay far
more than they had borrowed, subsidizing not only students in low-paying professions,
but the 15 percent of graduates who were deadbeats. Few students realized how
many classmates would renege on the loans.
Even where controversial social policy issues have been resolved, collection
of debts has often been a problem, especially in developing countries with poorly
functioning or nonexistent tax and credit systems. In the 1980s, Brazil, Venezuela,
and Kenya each had loan programs with roughly 90 percent default rates. In an
even worse case, an official body in Ghana recently reported that out of $27.5
million loaned to more than 400,000 college students since 1988, only $1.1 million
has been paid back. In many cases, says Salmi, it would have
been cheaper to substitute loans with outright grants or scholarships.
But, he adds, many countries have learned from their mistakes.
Lessons Learned
Jamaicas government-sponsored loan system was near collapse three
years ago because only about a third of loans were repaid. The biggest deadbeats
were not low-income students, but those who became physicians and lawyers. As
part of efforts to make the system more financially viable, the Student Loan
Bureau began an advertising campaign appealing to students civic duty,
and published shame lists with the names and photographs of those
with outstanding debts. Within months, repayments improved substantially.
Even the United States and Canada were plagued by high rates of default in the
1980s. At the end of the decade, U.S. officials began to refuse loans for study
at institutions with graduates who had very high default ratesgenerally
for-profit colleges with poor programs that did not lead to good jobs. The default
rate for most student loansgovernment guaranteed but provided by commercial
lenderswas 21.4 percent in 1989. Now, the rate is 5.6 percent. A strengthening
economy contributed to the improvement.
A number of poor-quality, for-profit institutions that lost the right to provide
federal loans to their students were forced to close. The loan system thus played
an important secondary role as an instrument for quality promotion. Some loan
programs in developing countries, such as one in the state of Sonora in Mexico,
have used a similar approach to try to steer students to stronger institutions.
The worlds first national student loan program, according to Salmi, was
established because one graduate wanted to share his good fortune with others.
In the late 1940s, Gabriel Betancourt, a young Colombian from a poor family,
persuaded the manager of the company he worked for to lend him money to study
abroad. He was so grateful for the opportunity that, after graduating, he successfully
lobbied the Colombian government to establish a permanent loan mechanism. In
1950, he became founding director of the Colombian Student Loan Institution.
The institution continues providing loans today, but only to 6 percent of studentsdown
from a high of 12 percentdue to a lack of government support.
In many poor countries with largely black market economies and no formal income
taxes, economists are skeptical about the possibilities of creating viable loan
programs. Without any means of tracing income, loan programs are not going
to work, except on a small scale, warns Bruce Johnstone, a professor and
director of the Center for Comparative and Global Studies in Education at the
State University of New York at Buffalo.
Creating the Infrastructure
Although this means abandoning the pretense of making higher education available
to rich and poor alike, Johnstone says very poor countries may have to settle
initially for modest loan programs, perhaps providing the money only to those
who can provide collateral, or to graduate students, since they would be more
likely to obtain gainful employment after graduation. For many poor countries,
especially in Africa, only now contemplating the controversial decision of introducing
tuition, the question of whether broadly available loans can work remains unanswered.
But the World Bank, stung by past criticisms that its policies have hurt the
poor, is committed to the idea. No country should introduce cost sharing,
says Salmi, referring to tuition payments, without a proper mechanism
for student loans and student aid.
©2001. The Chronicle of Higher Education. Reprinted with permission.
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