Student Loans in Portugal: Why and How? Manuel Heitor Secretary of State for Science, Technology and Higher Education June 2, 2008.

Student Loans in Portugal:

Why and How?

Manuel HeitorSecretary of State for Science, Technology and Higher Education

June 2, 2008

Public subsidies for education to households and other private entities as a percentage of total public expenditure on education, by type of subsidy; OECD (2007). Reference Year: 2004

Source:.

OECD Education at a Glance:

Student support in Portugal: 2004

2008

Source: EAG, OECD, Last year available.

Expenditure on institutions as a percentage of GDP (public and private sources, public and private institutions)

Why? …which specific context?Opening-up Tertiary Education: a Reform process

How? Student loans with mutual guarantee …and how to evolve? What else do we need to know?

Student Loans in PortugalBasic Propositions (Nick Barr, OECD, April 2008): • Students matter!...and we need to enlarge access to HE• The world has changed!• Competition matters!…Graduates (not students) should contribute to the costs of their degree.

The structure of the lecture: 3 main goals

• NEW ACCESS REGIME FOR ADULTS

- 11.773 new adults entered Tertiary Education in 2007-2008

- 10.850 in 2006-2007

(while, just 900 in 2005-2006)

• NEW LEGAL FRAMEWORK FOR SHORT VOCATIONAL CYCLES - (CETs)

- More than 4.800 admitted students in 2007

- Around 150 CETs in Tertiary Education Institutions

• NEW STUDENT LOANS SYSTEM

- 3.000 loans contracted in the period November 2007 – May 2008

Opening-up Tertiary Education - 1Some key measures and results (2006-2007): Access

• THE BOLOGNA PROCESS: dynamic and on-going…- 87% of initial educational programs in 2007-2008.

…and beyond:

• The New Legal Regime of Higher Education Institutions (RJIES)

• Diversity of governance systems and increased autonomy• Setting up Governing Boards with external participation• Possibility of independent legal status for public institutions: namely as public

foundations)• Establishment of consortia among institutions• Recognition of research centres as part of University management framework.

• The creation of conditions to foster the national and international mobility of

students and graduates

• New Regulations on Arrangements for Changes of Study Programmes,

Transfers and Return to Higher Education

• New legal framework for the recognition of foreign degrees, which simplifies

the system for recognizing foreign degrees in Portugal.

Opening-up Tertiary Education - 2Some key measures and results (2006-2007): Legal Reform

• NEW CONTRACTS FOR PhD RESEARCHERS/TEACHERS- 630 new contracts supported in 2007- At least 1.000 new contracts supported until 2009

• DOCTORATE AND POST-DOCTORATE GRANTS- Around 2.080 new PhD grants in 2007 (a 77% increase from 2005)- Around 900 new Post-Doctorate grants in 2007 (a 41% increase from 2005)

• INTERNATIONALIZATION - PARTNERSHIPS FOR THE FUTURE R&D CONSORTIA WITH POST-GRADUATE PROGRAMS

Opening-up Tertiary Education - 3

- MIT-PORTUGAL: 4 new PhDs in Engineering Systems (Energy, Transports, Advanced Manufacturing and Bioengineering)

- CMU-PORTUGAL: 5 new PhDs in ICTs

- UTAustin-PORTUGAL: 3 new PhDs in Digital Media, Advanced Computing and Mathematics

Some key measures and results (2006-2007): Commitment to Science

All students; all institutions

Universal, but also competitive in the bank sector

Does not demand any kind of endorsement or patrimonial guarantee

Largest banks distribute this credit line all over Portugal

Automatic and fast bank approval in most cases

Very low fixed interest rate [Maximum spread of 1%]

Interest rate varies negatively according to academic performance

[reduced by 0,80% for students with yearly average classification

between 16 out of 20 points and by 0,35% if above 14 points]

Loan between Eur 1.000 and Eur 5.000 per academic year

Payments in 12 months

Grace period of one year

Reimbursement during in a number of years as many as twice the course duration

Student loans with mutual guarantee

SMEs Banks

State

GuaranteeSheme

Guarantee

Guarantee commission (fee)

Bank loan

Counter GuaranteeFinancial Support

Legal environment and framework

Why Mutual guarantee ?Historical Guarantee Triangular Relationship

Source: SPGM, 2008

Students(both undergraduateand postgraduate)

Banks

State (1)

GuaranteeSheme

Guarantee (2)

Counter GuaranteeFinancial Support

Bank loan (3)

Legal environment and framework

Guarantee commission (fee)

(1) Ministry of Science, Technology and Higher Education(2) Portfolio guarantee (covers losses up to 10% of bank loan values)(3) Up to Eur 5000 per academic year

Student loans with mutual guaranteeExtended Guarantee Triangular Relationship

Source: SPGM, 2008

MULTIPLIER OF PUBLIC INVESTMENT in the

PORTUGUESE MUTUAL GUARANTEE SCHEME(accumulated December 2007 - million euros)

2 348

966612

150131

1 721

Public Investment(SPGM +Counterguarantee)

Total Investment(public + private atMGS)

Counterguaranteesissued

Guarantees Issued

Loans and otherfinancing to SME

Investment madeby the SME

Mutual SME: +- 3000

Jobs created or sustained:> 57 000

Nr. guarantees issued:> 8000

Why succeeding with Mutual guarantee in Portugal?

Source: SPGM, 2008

Strategic view and coordination

Mutual Guarantee and other financial instruments

COUNTER

GUARANTEE

FUND

(MCGF)

Mutual Guarantee Societies (MGS)

-NORGARANTE

- LISGARANTE

- GARVAL

- AGROGARANTE

Banks and other guarantee

beneficiaries

SME and Students

Automatic Counter Guarantee

Counter Guarantee fees

Guarantees

MGS shares - mutualism

Guaranteed loans

Counter Guarantee Counter Guarantee --held by public entities held by public entities

Mutual Guarantee Societies Mutual Guarantee Societies --mainly privately heldmainly privately held

SPGMScheme “holding ”

- Counter Guarantee Fund Management- Portuguese Mutual Guarantee Scheme development and

marketing ( “umbrella ”)- Several Back -Office services to Mutual Guarantee Societies- First level control of the Scheme- Minority Participations in the MGS share capital

Guarantee fees

Interest

and loan repayments

Under EU MAP

All MGS apply a homogeneous credit assessment, according to principles and rules discussed and approved by all entities of the scheme

So

urc

e:

SP

GM

, 2

00

8

Source: Comissão de Acompanhamento do Sistema de Empréstimos, Maio 2008.

• Student loans contracted: ≈ 3.000

• Total amount of contracted loans: 33,7 M Euros

• Amount of contracted loans for 2007-2008: 14 M Euros

• Students in public institutions / Private institutions ratio: 60/40

Student loans with mutual guarantee November 2007 – May 2008

External Assessment: OECD Review Panel, March 2008

Student loans with mutual guarantee November 2007 – May 2008

… The model of providing student loans by way of a line of credit via the banking system, using the vehicle of the mutual guarantee scheme, is a pace-setting international innovation. The Portuguese initiative satisfies the key policy criteria: it is a horizontally equitable scheme; it represents good value for students; it is financially sustainable at higher volumes of student take-up; it is low risk for government and financial institutions; it avoids the need for additional administrative infrastructure.

…

In: Notes on the reform of the Portuguese higher education systemMichael Gallagher, 7 March 2008

…and how to evolve? What else do we need to know?

1.Who are the students with loans ?

2. Beyond mutual guarantee ?• Income contingent loans vs conventional sheme ?

• Which best scheme: hybrid ?

• When ?

3. Which economics of tertiary education ?

What needs to be payed? … who is paying?

Who are the students with loans?Degree Program

Source: Comissão de Acompanhamento do Sistema de Empréstimos, Maio 2008.

Who are the students with loans?Geographical distribution

Source: Comissão de Acompanhamento do Sistema de Empréstimos, Maio 2008

Who are the students with loans?What else do we need to know ?

• socio-economic characterization

• relation with public support system

• what can we learn from other systems and countries?

Loans beyond mutual guarantee ?

1. How far can we extend the current mutual guarantee system?

• Increased dependence on academic performance ?

• Loans larger than Eur 5.000 per academic year ?

• Grace period larger than one year ?

• Reimbursement period larger than twice the course duration ?2. How far can we complement the system with other schemes?

• How does it depend on the fiscal system and performance ?

• Income contingent loans vs conventional sheme ?

• Which best scheme: hybrid ?

• When ?...how many years after introducing loans ?

Eurostudent 2005 Relative share of student income in Europe(only students away from their parents home)

Source: CIES-ISCTE, Eurostudent 2005.

5134

45

11

3828 28

42

70

26

2744

45

52

3343

5744

21

17

13 9

8

3029 27

11 48

52

9 13 7 4 10 4

Alemanha Áustria Espanha Finlândia França Holanda Irlanda Letónia Portugal ReinoUnido

Família Trabalho Estado Outras

Which economics of tertiary education?

Student support in Portugal: 2008 and beyond…

Support to students (public and private institutions)

Source: Public Budget 2008; GPEARI/MCTES. Approximate figures.

Forecast ?

Forecast:

Social Support annual increase: 2,5%

New loans per year annual increase: 25%

From 3.000 new loans per year.

Which economics of tertiary education?

Budget - 2008

M Euros

Source: Public Budget 2008. Approximate figures.

Student Loans in Portugal What else do we need to know?