Design and Implementation of Student Loan Schemes: Lessons from International Experience Forum on Financing of Post-Compulsory Education in China Beijing,

Design and Implementation of Student Loan Schemes:

Lessons from International Experience

Forum on Financing of Post-Compulsory Education in China

Beijing, 6 June 2007

Lending for human capital

Outline of the Presentation

Why Student Loans?

Design Issues: Types of Student Loans

Implementation Issues: Taking Stock of International Experience

Why Student Loans?

Financial viability

Equity

Student motivation

Quality assurance

Financial viability

Possibility to introduce / increase tuition fees in public universities

Possibility to expand private tertiary education institutions

Self-financing mechanism

Equity Opportunities for low-income

and minority students

Solidarity: helping tomorrow’s students

Student motivation

Better individual academic results

Higher internal efficiency in institutions

Quality assurance

Linking eligibility of institutions to quality assurance criteria Accreditation Labor market outcomes

Why government intervention?

Capital market imperfections Collateral Information about completion Information about future income

Equity considerations

Outline of the Presentation

Why Student Loans?

Design Issues: Types of Student Loans

Scope and Ownership of Student Loan

Programs

Public For-Profit Private

Non-Profit

Private Nation-

Wide

Fundayacucho (Venezuela)

Intermediary Agencies (USA)

Commercial Banks

(many countries)

FUNDAPEC (Dom. Rep.)

Region/

Province

/State

ICEES (Mexico) Quebec

Massachusetts SACEV (Venez.)

Association-

Based

SOFES (Mexico)

Institution-

Based

Universities in China

Universities in USA

Organizational Structure of Student

Loan Schemes

Type of

Organizational Setup

Example

Department within

University

USA, Mexico, China,

Specialized Agency ICETEX (Colombia)

Commercial Bank Many Countries

Agency with Commercial

Bank

FUNDAYACUCHO

(Venezuela)

Government with Agency USA

Government with

Commercial Banks

Canada

Types of Financial Schemes

Direct loans

Guaranteed / shared risk loans

Income-Contingent Loans

Direct loans

Public resources

Mortgage type

Subsidies Interest rate Default

Repayment not linked to income

Guaranteed / Shared risk loans

Government contract with commercial banks

Shared default risk

Mortgage type

Interest subsidy

Income-contingent loans

Graduates repay fixed proportion of income

Need for solid recovery channel Tax System (Sweden / Australia) Social Security (Ghana)

Tuition Postponement Experience (Yale U)

Risk pooling

Moral hazard

Collection for individual university

Repayment modes

Fixed payments

Graduated payments

Proportion of income

Fixed vs. Graduated Repayment Schedule

Years

Dollars

Salary

Graduated Payment

Fixed Payment

Outline of the Presentation

Why Student Loans?

Design Issues: Types of Student Loans

Implementation Issues: Taking Stock of International Experience

Implementation difficulties

Demand

Funding

Financial Viability

Targeting

Demand problems

Awareness

Attractiveness Interest ratePriority disciplinesGuaranteesRepayment period

Insufficient funding

Overall funding

Stability over time

Financial viability

Interest Rate Subsidy

Default RateEconomic situation Ineffective collection

mechanisms

Exemptions

Administrative Costs

Real Interest Rate

Country Real Interest RateMortgage LoansVenezuela -23%Kenya -6.9%Chile 1.0%Honduras 3.0%Indonesia -2.3%Brazil -14.9%Jamaica -5.6%Denmark 1.6%Japan -1.4%United States 3.8%Finland -0.6%Norway 5.6%Colombia 3.0%Hong Kong -6.3%Province of Québec,Canada

5.2%

Barbados 4.1%Income-ContingentLoansAustralia 0.0%Sweden 1.0%

Source: Albrecht, D. y A. Ziderman (1992). Deferred Cost-Recovery for Higher Education: Student Loan Programs in Developing Countries. World Bank paper No. 137. Washington D.C.

Real Interest Rates

-23.0%

-14.9%

-6.9%

-6.3%

-5.6%

1.0%

1.0%

1.6%

3.0%

3.0%

3.8%

4.1%

5.2%

5.6%

-0.6%

-2.3%

-1.4%

-25% -20% -15% -10% -5% 0% 5% 10%

Venezuela

Brazil

Kenya

Hong Kong

Jamaica

Indonesia

Japan

Finland

Australia

Chile

Sweden

Denmark

Honduras

Colombia

United States

Barbados

Province of Québec, Canada

Norway

0.0%

Exemptions

Advanced or on-time payments

Work with priority public institutions

Outstanding academic results

Collection

a reliable, preferably universal, system of unique identifiers

accurate record-keeping of the accruing liabilities of students (while studying)

efficient way of determining with accuracy, over time, the actual incomes of former students

collection mechanism with a sound, computerized record-keeping system

Loan Recovery(Proportion of Present Value of Loan)

Country Without default andadministrative costs

With default andadministrative costs

Mortgage LoansVenezuela 77 8Kenya 30 8Chile 52 18Honduras 49 27Indonesia 43 29Brazil 38 29Jamaica 44 30Denmark 48 38Japan 50 40United States 71 47Finland 65 48Norway 67 52Colombia 71 53Hong Kong 57 53Province of Quebec,Canada

69 63

Barbados 87 67Income-Contingent LoansAustralia 52 43Sweden 72 67Source: Albrecht, D. y A. Ziderman (1992). Deferred Cost-Recovery for Higher Education: Student LoanPrograms in Developing Countries. World Bank paper No. 137. Washington D.C.

Targeting

Leakage due to ineffective screening of applicants

Elimination of targeted students because of excessive guarantees

Targeting modalities

Self-declaration with audit

Income tax information

Proxy (secondary education, housing)

Guarantees

Guarantor(s)

Moral Guarantor

State

University (SOFES)

Loan beneficiaries by income group

0

0. 2

0. 4

0. 6

0. 8

1

1. 2

high

est

midd

lehi

gh

midd

le

midd

le low

lowe

st

f ami l y i ncome l evel

prop

orti

on o

f re

ceiv

ers yes

i n processno

Success Factors

Efficient Institutional Management

Appropriate Financial Management

Transparent Eligibility Criteria and Processes

Efficient Loan Recovery Good Information and

Marketing System

Performance indicators

Demand IndicatorsFinancial Management

IndicatorsOperational Management

Indicators

Demand and Targeting Indicators

Evolution of higher education enrollment rate

Proportion of beneficiaries from low and medium income families

Gender distribution of students and beneficiaries

Geographical distribution of students and beneficiaries

Distribution of students and beneficiaries by academic program

Coverage (number of beneficiaries over student population)

Academic results of beneficiaries (compared to general student population)

Financial Indicators Arrears & default rates (by socioeconomic

group, gender, tertiary institution, academic discipline, and amount of loan)

Interest rate subsidy level Loan recovery ratio Administrative costs compared to overall

portfolio (and distribution of main expense categories)

Cash flow projections Evolution of real value of assets Distribution of funding sources Dependency on government resources Mobilization of non-government resource Return on investment

Institutional Operations Indicators

Management indicators (measuring the efficiency and quality of internal processes)

Satisfaction of beneficiaries

Turnover of personnel

Indicators of promotion of the student loan program (awareness of the program and understanding of the terms and obligations)

conclusion: the student loan challenge

Social vocation: instrument to promote equity

Financial viability imperative Not a mechanism to deliver subsidies

If a man empties his purse into his head, no man can take it away from him. An investment in knowledge always pays the best interest.

Benjamin Franklin