design and implementation of student loan schemes: lessons from international experience forum on...
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Design and Implementation of Student Loan Schemes:
Lessons from International Experience
Forum on Financing of Post-Compulsory Education in China
Beijing, 6 June 2007
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Lending for human capital
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Outline of the Presentation
Why Student Loans?
Design Issues: Types of Student Loans
Implementation Issues: Taking Stock of International Experience
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Why Student Loans?
Financial viability
Equity
Student motivation
Quality assurance
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Financial viability
Possibility to introduce / increase tuition fees in public universities
Possibility to expand private tertiary education institutions
Self-financing mechanism
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Equity Opportunities for low-income
and minority students
Solidarity: helping tomorrow’s students
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Student motivation
Better individual academic results
Higher internal efficiency in institutions
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Quality assurance
Linking eligibility of institutions to quality assurance criteria Accreditation Labor market outcomes
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Why government intervention?
Capital market imperfections Collateral Information about completion Information about future income
Equity considerations
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Outline of the Presentation
Why Student Loans?
Design Issues: Types of Student Loans
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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
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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
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Types of Financial Schemes
Direct loans
Guaranteed / shared risk loans
Income-Contingent Loans
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Direct loans
Public resources
Mortgage type
Subsidies Interest rate Default
Repayment not linked to income
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Guaranteed / Shared risk loans
Government contract with commercial banks
Shared default risk
Mortgage type
Interest subsidy
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Income-contingent loans
Graduates repay fixed proportion of income
Need for solid recovery channel Tax System (Sweden / Australia) Social Security (Ghana)
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Tuition Postponement Experience (Yale U)
Risk pooling
Moral hazard
Collection for individual university
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Repayment modes
Fixed payments
Graduated payments
Proportion of income
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Fixed vs. Graduated Repayment Schedule
Years
Dollars
Salary
Graduated Payment
Fixed Payment
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Outline of the Presentation
Why Student Loans?
Design Issues: Types of Student Loans
Implementation Issues: Taking Stock of International Experience
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Implementation difficulties
Demand
Funding
Financial Viability
Targeting
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Demand problems
Awareness
Attractiveness Interest ratePriority disciplinesGuaranteesRepayment period
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Insufficient funding
Overall funding
Stability over time
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Financial viability
Interest Rate Subsidy
Default RateEconomic situation Ineffective collection
mechanisms
Exemptions
Administrative Costs
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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.
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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%
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Exemptions
Advanced or on-time payments
Work with priority public institutions
Outstanding academic results
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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
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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.
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Targeting
Leakage due to ineffective screening of applicants
Elimination of targeted students because of excessive guarantees
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Targeting modalities
Self-declaration with audit
Income tax information
Proxy (secondary education, housing)
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Guarantees
Guarantor(s)
Moral Guarantor
State
University (SOFES)
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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
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Success Factors
Efficient Institutional Management
Appropriate Financial Management
Transparent Eligibility Criteria and Processes
Efficient Loan Recovery Good Information and
Marketing System
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Performance indicators
Demand IndicatorsFinancial Management
IndicatorsOperational Management
Indicators
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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)
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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
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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)
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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