Why should the public pay all the cost for individuals to attend universities when much of the gain from higher education is captured by graduates who, over their lifetimes, earn much higher-than-average salaries because of the payoff from educational investment?
Yet it is well known that, left to itself, the commercial banking market will not provide students with loans to help them finance their higher education. The disincentive for a bank lending to students is that there is no saleable collateral in the event of default, such as would be the case for the housing capital market. As well, investment returns from higher education are highly variable and uncertain.
The public spillovers and private benefits from higher education suggest that a combination of a market-based approach and government intervention will best correct the market failure involved.
In Thailand, as in practically all countries, governments have intervened to help ensure that students have access to loans. But the Thai experience with student loans over the last 15 years or so has been very unusual, even unique. The recent change of government in Thailand is likely to encourage further debate about, and reform to, student loans. The issue is a live one in Bangkok.
There are essentially two types of student loan schemes, with Thailand the only country to have experimented with both. The first is for a government to act as a guarantor for student loans provided by banks (or, equivalently, loans provided by the government) to be repaid within fixed time periods (and often with the government paying the interest on the debt for the period before the borrower’s graduation). This type of scheme is used in the United States and Canada, and was the essence of Thailand’s Student Loan Fund (SLF), initiated in 1996.
The second type of government intervention is known as an income contingent loan, in which repayments are collected through the income tax system, with repayments dependent on borrowers’ future economic circumstances. Such a policy was implemented in Australia in 1989 as the Higher Education Contribution Scheme (HECS). Variants of this approach now operate in New Zealand, the UK and Hungary. With the encouragement of then-prime minister Thaksin, Thailand introduced its own version of an income-contingent loan scheme in 2006, based on HECS, and known as the Thai Income Contingent Allowance and Loan (TICAL) system. TICAL was discontinued after one year of operation, after which a new version of the SLF was reintroduced, in 2007.
It is useful to compare the two types of loan schemes that are relevant to the contemporary Thai higher-education funding debate. The SLF, being a mortgage-type loan, means that borrowers are obliged to repay their debts over a given time period. This means that former students who have low incomes will find it relatively difficult to repay their debts. Research suggests that, for a small but significant minority of student debtors in Thailand, the so-called repayment burden — the proportion of a graduate’s income that has to be allocated to debt repayment — can be as high as 70 per cent. In most of these cases the former student will default on their debt and as a consequence face difficulties in securing loans in the future.
Another concern with mortgage-type loans such as the SLF is that, in order to minimise potential problems with repayments, governments typically offer interest rate subsidies, and these can constitute a high cost for the government. With respect to the SLF, it has been calculated that the implicit subsidy inherent in the interest rate arrangements effectively means that at least 65 per cent of the loan is in fact a grant rather than a loan. This might not matter if the goal is to help the poor to gain access to higher education, but it needs to be recognised that the SLF in essence is not a student loan.
TICAL also had its problems. One was that, due to the interest rate and repayment conditions, it was also associated with very large subsidies, perhaps similar in magnitude to those from the SLF. It is also not clear that the income tax authorities were both willing and able to collect an income-contingent loan. Sorting this out in administrative and political terms is a critical issue for contemporary debate.
There are two reasons why TICAL is likely to be back on the policy agenda in the near future. One is that it is becoming increasingly apparent that student loan policy in Thailand is in need of considerable improvement, perhaps even radical reform. The second is that the SLF was brought back in 2007 in part because of the demise of TICAL’s main political support, it being arguable that this support has reappeared in a different form.
Bruce Chapman is the Director (Policy Impact) at the Crawford School of Economics and Government. He was a consultant to the 2008 Review of higher education, which recommended most of the changes adopted by the Australian Government.
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Where is Thailand Headed’.
While HECS type scheme has been proven to be useful in high income countries, a loan type with an obligation to pay back may be more appropriate in developing countries where brain drain can be significant.
For a HECS type scheme, the repayment is in terms of tax and there will no repayment if the person is not working in the country where he/she have used the HECS.
Given that differences in income levels for a university graduate between high income countries and most developing countries can be fairly large, brain drain can present a problem for developing countries if they use the HECS type because brain drain results in a significant subsidy or transfer of their limited public resources to high income countries.
On the other hand, if there is obligation to repay a loan used in financing university studies no matter where the person lives and works, this kind of loss can be minimised.
Bruce Chapman’s analysis has two shortcomings:
First, assuming that Thailand has similar socio-economic structure as Australia, Chapman fails to realize that his assumption is in contrast to the fact. He should at least look at economic income distribution in finding the source of revenue to pay for higher education in Thailand. For example, over 60 years of Bhumibol’s reign, the non-native US-born and Swiss-educated has been doing very well; the Thai monarchy is the richest family in the world with no responsibility for paying taxes yet still receive the budget of $10 million per year for personal expenses. The following is quoted from The Sydney Morning Herald, December 2, 2011:
“A new book has lifted the secrecy surrounding Thailand’s monarchy, detailing investments and ownership of tens of thousands of properties worth more than $US40 billion.
Titled King Bhumibol Adulyadej: A Life’s Work, the book also reveals that a unique and little-known institution, the Crown Property Bureau, is one of the largest investors in Thailand, controlling assets valued at $US6.7 billion ($A6.6 billion).
The bureau owns 8400 hectares in Bangkok, mainly in the historic part of the city, worth an estimated $US33 billion at 2010 prices.
Across the country the bureau has 40,000 rental properties – about 17,000 in Bangkok – that include government offices, slum communities and prime commercial sites occupied by hotels, office blocks and shopping centres, the book says.
And outside the capital the bureau owns a total of 33,500 hectares, it says.”
Second, Bruce Chapman fails to recommend that higher education has to go hand in hand with political progress. Higher education assists individuals’ transformation, fosters critical thinking, and enhances creativity. Yet when expressing moral conscience, liberty and creative ideas, the Thai with higher education were put in jails. Thus far lese majeste law article 112 has succeeded in putting the best and brightest Thais in jail. What is the point of higher education when one cannot speak truth?
“It also reveals that the US-born and Swiss-educated King Bhumibol, the world’s longest-reigning monarch, has been a critic of Thailand’s harsh lese-majeste laws, under which more than 300 people have been charged since 2006.
Under the law, anyone who insults the king, queen, heir or regent faces up to 15 years jail on each charge. The book quotes King Bhumibol as saying in 2005 that the king should be subject to criticism and that the laws damage the monarchy.” The Sydney Morning Herald, December 2, 2011.
Bhumibol has played the strategy of “have the cake and eat it, too.” That is, he can instrument the change yet he refuses to do so.
Without taking socio-economic and political context into the consideration,Bruce Chapman’s analysis is too dry and mechanical — losing its soul.