Tag Archives: Student loan

The international transformation in student loan systems

By Bruce Chapman and Lorraine Dearden

The University of Bologna, considered to be the first official university, was established in the late 11th century, and some scholars in need of finances were offered loans. This type of provision was not formalised as a student loan system until 1240 when the Bishop of Lincoln did so using money from the University of Oxford.

Many other universities followed suit, but it took until 1951 for the government of Colombia to initiate the world’s first national student loan scheme, known as ICETEX, which is still in (faltering) operation.

Over the 1960s and beyond, these arrangements became commonplace and today the higher education financing systems of the vast majority of countries are underpinned by student loan schemes.

There is a consensus in economics that loans are an essential part of government higher education policy to help relatively poor prospective students pay for tuition and-or to provide income support during periods of full-time study.

The reason is that, unlike in many other areas of funding (such as mortgages to finance the purchase of a house), commercial (bank) borrowing by students for human capital investments is unavailable simply because in the event of default a lending agency bears all risk; there is no collateral available to be sold to offset the cost of uncollectible debts.

Future income

Until 1989 these systems were all characterised by the collection of debt over a given time period, like a mortgage, and are known as time-based repayment student loans or TBRL.

However, nearly 30 years ago there began a quiet revolution internationally in higher education financing policy. This happened in Australia with the introduction of a student loan system in which debt obligations are not based on time, but instead depend on the future income of the debtor.

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Lessons from the End of Free College in England

 

By Judith Scott-Clayton, Richard Murphy and Gill Wyness

This blog is based on a full-length article published at https://www.brookings.edu/research/lessons-from-the-end-of-free-college-in-england/

 

Earlier this month, New York became the first US state to offer all but its wealthiest residents free tuition at public four-year institutions in the state. This new ‘Excelsior Scholarship’ doesn’t make college completely free, nor is it without significant restrictions. Still, it demonstrates the growing strength of the free college movement in the United States.

The free college movement in the US is typically associated with liberal and progressive politics, and motivated by concerns about rising inequality and declining investments in public goods like education. Americans are thus sometimes surprised to hear the story of the end of free college in England was built upon very similar motivations.

Until 1998, full-time students in England could attend public universities completely free of charge.  Two decades later, most public universities in England now charge £9,250 – equivalent to about $11,380, or 18% more than the average sticker price of a U.S. public four-year institution.

Has this major restructuring of higher education finance over the last twenty years led the English system backwards or forwards in terms of improving quality, quantity, and equity in higher education?  We find that at a minimum, ending free college in England has not stood in the way of rising enrollments, and institutional resources per student (one measure of quality) have increased substantially since 1998. Moreover, after many years of widening inequality, socioeconomic gaps in college attainment appear to have stabilized or slightly declined.

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US Elections: messing with the small print won’t address the issue of student debt

by Richard Murphy

Higher education finance might be the last thing on America’s minds when they cast their votes on Tuesday. However, the fact that both candidates have set out plans to reform the US’ student loan repayment schemes is perhaps indicative of the importance of this issue in the US. The problem is, both candidates are just messing with the small print, and their plans which will do very little to help graduates struggling with student debt.

Trump intends to push for an income-driven repayment plan that would increase the level of the payments students have to make (by increasing the cap on payments from 10 to 12.5 percent of income) but reduce the repayment period to 15 years from its current period of 20-25 years (depending on the scheme). Meanwhile Clinton has endorsed the current plans, with the caveat that she aims to simplify the number of plans.

But will these proposals help students who are struggling with their loan repayment? The short answer is no.

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Choosing the type of income-contingent loan: risk-sharing versus risk-pooling

By Maria Racionero & Elena Del Rey, Centre for Economic Policy Research, Research School of Economics, Australian National University

There is a growing trend around the world towards increasing students’ contributions to the cost of higher education. One of the advantages is that, when students pay for their education, they do so in the country where they study. Relying on tuition fees to finance higher education can however be both inefficient and unfair, preventing access to higher education to liquidity constrained but academically deserving individuals. Even if loans are available, risk aversion can negatively affect participation. Income-contingent loans (ICLs) provide insurance against adverse labour market outcomes by making repayments dependent on the amount of income earned. In particular, no repayment is typically due when earnings are below a minimum income repayment threshold. Australia was the first country to implement in 1989 an ICL scheme to finance the cost of higher education, and other countries have since adopted similar schemes. These schemes have traditionally relied on general taxation to finance part of the cost of education, and most notably the cost of education of those unable to achieve the minimum income repayment threshold.

In Chapter 8 of “The Mobility of Students and the Highly Skilled: Implications for Education Financing and Economic Policy”, we explore the choice between two types of ICLs: one partly subsidised, often denominated risk-sharing ICL, where the cost of the education of the unsuccessful students falls on the taxpayer; and the other self-financed, often denominated risk-pooling ICL, where the cost of the education of the unsuccessful students falls on the successful graduates of the cohort. Our purpose is to capture the situation faced by governments, such as those in Australia or UK, considering switching from partly subsidised to mostly self-financed funding schemes, while still providing insurance through income contingent repayments.

We consider individuals who are risk-averse and differ in their ability to benefit from education and inherited wealth. We first compare the higher education participation achieved with each scheme. We then show how each individual’s preference over the schemes depends on her ability and wealth and characterise the majority voting outcome. We identify circumstances under which the self-financing ICL is supported by a majority, even if a proportion of those who always study regardless of the scheme in place – precisely those with relatively higher wealth and ability – prefer the subsidised to the self-financed ICL.

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Who pays for free higher education? The case of Scotland

By Lucy Hunter Blackburn

Student debt is not really an issue in Scotland.  This common belief is based on the country’s well-known policy of free tuition. It is pretty much true, for Scots whose families can cover their living costs in cash or kind.  The picture is different, however, for those whose starting point is less privileged. Indeed, Scotland is an instructive case for what happens when fees become the whole focus of political debate about student debt and “ability to pay”.

Lucy Hunter Fig 1

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