Reform Needed In Devising Higher Education Student Loans

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CHALK TALK

Reform Needed in Devising Higher Education Student Loans

There are effectively two types of student loan schemes in use around the world today.

BANGKOK: -- The first is a mortgage-type loan scheme in which the government acts as a guarantor for student loans provided by banks. The second type is known as an income contingent loan, in which repayments depend on borrowers' future income streams. Thailand is one of a few countries to have experienced both types of schemes.

An income contingent student loan scheme was first introduced in Thailand in 2006 under then-prime minister Thaksin Shinawatra. Known as the Thailand Income Contingent Allowance and Loan (TICAL06) scheme, it replaced an existing Student Loan Fund (SLF), which was more a mortgage-type loan system in use since 1996. However, TICAL06 lasted only a year, replaced with the SLF in 2007 after a military coup overthrew the government on September 19, 2006.

It is important to recognise the differences between the two types of loan schemes mentioned above with reference to debt repayment, interest rates charged, and to whom the loans are made. Borrowers under the SLF were obliged to repay their loans over a fixed period of 15 years, with a 6-year grace period from the date of enrolment during which no interest was charged. The entire loan principal had to be repaid in increasing proportions over 15 years with 1 per cent interest charged on the outstanding loan principal. The low nominal interest rate charged effectively turned negative in real terms. Chapman and others (2010) calculated that the implicit subsidy inherent in the interest rate arrangements (as well as default and administrative costs) resulted in at least 65 per cent of the total loan turning into a grant. Clearly, the SLF was an enormously expensive and inefficient loan system, even though limited to students whose family income did not exceed Bt200,000 per year.

TICAL06 in contrast was a universal scheme in that loans were made available to all students in higher education irrespective of their family incomes. Repayments of TICAL06 loans were based on borrowers' future income streams, with the first before-tax-income threshold of repayment set at Bt16,000 per month. It should be borne in mind that students investing in higher education face a certain degree of risk, the more so if they have to borrow funds to finance their human capital investments. With uncertainty over their future income streams, there is no guarantee that borrowers will be able to recoup their investments over their entire working lives. Loans given with an income contingent repayment component provide insurance mechanisms against both default and repayment difficulties, giving the TICAL06 scheme had a vast practical advantage over the SLF. Another advantage comes from yearly adjustments made for inflation of the money owed, thereby preventing erosion of its real value over time.

TICAL06 is not without flaws, however. Its repayment conditions resulted in turning some 70 per cent of the loans as subsidies to their borrowers, similar to that of the SLF. Chapman and Lounkaew (2010) estimated that about one in three graduates would not be able to repay their debts at all since their future earnings would not be high enough to reach the first repayment threshold of Bt16,000 per month. Total government subsidies in monetary terms would have been much higher than that under the SLF as TICAL06 was not tied to family income, and would have resulted in a larger number of loans being given. The estimated resultant subsidy of 70 per cent was premised on tax authorities being able to effectively track the future earnings of all graduates until they reached the age of 60, beyond which any remaining debts would be dispensed with. Such assumption was optimistic considering the relatively large unofficial or informal sector of the Thai economy.

The present government's intention to launch a new version of TICAL shortly is welcome news. It is hoped that studies would have been made of past experiences to avoid their flaws and pitfalls. Because of the high degree of implicit subsidy in the loans made, it is prudent not to make TICAL12 a universal scheme (it being proposed that loans be given only to students whose family annual incomes do not exceed Bt300,000). The proposed first repayment threshold of Bt16,000 also seems too high given that the average income of college graduates has remained stagnant since the 1997 economic crisis. The scheme will also place a big burden on the government budget. Of even greater importance, TICAL12 should address the root cause of the debt repayment problem that will inevitably arise from the anticipated low future graduate earnings and to lend only to high school graduates who have obtained satisfactory academic results in nationally standardised exams and increasing their chances of success in tertiary education. At the same time, it will help to reduce the number of college dropouts and produce higher quality college graduates for the Thai labour market.

DILAKA LATHAPIPAT

Thailand Development Research Institute

-- The Nation 2012-04-16

[LPCustom69]

They definitely need to do something to help educate some of the poor bright students. It would be a win-win for Thailand