Loans

I mentioned student loan systems on the blog about a month ago (here). In particular, I mentioned a very useful IZA working paper by Shen and Ziderman (July 2008), which compares student loans systems from around the world. The paper is available here: here

This paper would be an excellent starting-point for anyone starting to look at the issue of student loan systems in depth. I read in the Irish Times today that part of the Minister's strategy is to look at the Australian system of student loans. In fact, student loans schemes are in operation in more than seventy countries around the world. According to Shen and Ziderman, "Most loans schemes benefit from sizeable built-in government subsidies and, in addition, are subject to repayment default and administrative costs that are not passed on to student borrowers." The authors focus on two particular issues:

(i) How much of the original loan is an individual student required to repay? (the repayment ratio), and
(ii) What percentage of the total costs of loans schemes can the lending body expect to receive back in repayments? (the recovery ratio)

Loan schemes are viewed favourably by many economists because borrowing to invest in human capital is one of the best investments that anyone can make. Some studies have shown that the returns to human capital are greater than on any other investment, and it is well-established that there are sizeable financial returns to education (in addition to social, cultural and career-based benefits). It has also been suggested that loan schemes may make the cost of higher education more salient to students and therefore encourage them to study harder and get more value from their investment.

An interesting article on debt aversion and higher ed participation is available here (and free-to-access here); this is something that I am keen to read more about.

It strikes me that debt aversion should not be a deterrent for any student considering higher education in the UK, if the student has been made fully aware of the full details surrounding the loan scheme in operation there. This Wikipedia page provides a very succint overview of the system. One major point is that the loan system is managed by the UK Student Loans Company (UK SLC). The SLC impose an interest rate matching inflation and this is a fair deal but it has to be communicated properly. Other details of the UK student loan system are that:

- repayments do not start until April of the year after students have completed their course
- repayments do not start until the student is earning more than 15,000 pounds
- the repayment is 9% of gross salary
- the repayment is transacted as an automatic deducation (through PAYE though this could as easily be a direct debit)
- there is no particular schedule for clearing the debt, but, if it has not been cleared 25 years after repayment began, or if the student turns 65 years old ---- then the remaining debt will be cancelled

A finance package like this is really a great deal, and the pay-off to not working during college (while financed under this package) could result in students attaining earning power much higher than they otherwise would have done.

Finally, to get some macro-facts it is worth noting that The UK Student Loans Company publishes Statistical First Releases (SFRs) which include information on Student Finance awards (loan rates, loan take up, grants awarded, etc) and Student Loans debt and repayment. Some interesting facts are the following:

• The table on this page shows that take-up of the scheme has increased from 28% in 1990/91 to 79% in 2004/05

• The total amount lent to eligible HE students during financial year 2007-08 was £3,905.0m, a rise of 32.2% compared to 2006-07

• Repayments posted to customer accounts amounted to £633.5m (including £194.4m paid earlier than required) in the financial year 2007-08.