A sustained effort to upgrade human capital is needed for countries in Southeast Asia to increase living standards to those of the advanced economies. Higher education and access to it are essential in boosting long-term productivity and supporting economic outcomes that are crucial to a country’s ability to integrate into the increasingly knowledge-based global economy.

Public investment is one element in improving higher education, but fully subsidising higher education has been shown to be inefficient and expensive. 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’.

1. Financing the expansion of higher education in East Asia
2. Principles for reforming higher education in Australia: is Bradley brave enough?
3. China’s higher education revolution

The federal budget’s announcements of wide-ranging changes to the youth allowance represent the most significant reforms to the system in 15 years, restoring fairness to a system that had strayed from its original purpose.

Many were surprised that the arrangements for this reform could be afforded when the Government seemed likely to postpone this kind of spending increase, given the present financial difficulties.

These changes are being financed essentially through the abolition of a substantial aspect of the allowance’s independent category. The result is increased fairness in a system established to allow greater access to higher education for poorer students.

First, a comment or two on the changes to the youth allowance associated with family and personal income tests. The three important words here are indexation, indexation and indexation.

The levels of income that formed the basis of eligibility had been tied to the consumer price index since 1998, which may seem like a fair thing. However, given that incomes will increase more than prices, it is likely to be this rule that explains why the youth allowance coverage has fallen from about 45 per cent to 32 per cent during this period.

Students from relatively poor families would have found it increasingly difficult to qualify for the maximum allowance and many from less poor but still disadvantaged backgrounds would have been increasingly unlikely to be eligible for any allowance payments.

This has been fixed through a much higher level of income qualifying for the maximum allowance.

Related to this is that the value to students of working part time has fallen substantially since 1993. Over this time period, the fortnightly amount that a student was allowed to earn before youth allowance began to be taken away had, extraordinarily, not been indexed at all.

However, these changes don’t come cheap. The federal Government has taken the advice of the Bradley Review by abolishing a strange aspect of the independence status, which saves enough money to underwrite a reform of the youth allowance.

In 1998 the government extended the basis under which full-time tertiary students under 25 would be considered to be financially independent of their parents and thus eligible for income support grants, even if living at home.
The additional criteria included: working a given number of hours in paid employment for a specified period; or earning $18,850 (in 2008 dollars) in a recent 18-month period.

The latter opened the possibility that students could receive non-means-tested income support after having taken a gap year or even through being employed at an exceptionally high wage rate for a short period by a family member or friend.

This policy development was probably a response to the possible inequities associated at that time with the increase in the age of independence to 25.

The number of students receiving the independent at home allowance increased rapidly from 1999 to 2003, from about 1000 in the first year to about 21,500 in the last. Since then the figure has remained virtually unchanged and stood at 22,689 in 2007, or about 18 per cent of all recipients of the youth allowance.

The critical policy issue concerns whether these income support recipients are in fact financially disadvantaged. In the research on this issue we considered that if young students were also from relatively high-income families it was likely that they did not also need this form of independence assistance.

My colleague Kiatanantha Lounkaew and I compared differences in the household incomes of higher education students who were receiving the youth allowance with those who weren’t. An important complication is that the type of allowance received (for example, means-tested living at home, independent at home or independent not living at home) is not identified in the survey.

Once we made steps to correct for this aspect we were able to compare the household incomes for those in the independent category with those who were not.

There are two striking findings from this exercise. First, as illustrated in the Bradley review, a significant number of young students on youth allowance have relatively high family incomes. For example, we found 36 per cent of the students in the independent at home category were in families with incomes of more than $110,000, and more than half of these had incomes of more than $150,000.

Second, when family incomes exceeded about $80,000, the income distribution of those on an independent youth allowance were extremely similar to those not on the youth allowance.

This is clear when we overlay the data the distributions are the same, an assertion we tested econometrically.
This exercise seems to suggest strongly that some present aspects of eligibility for independent youth allowance sit uneasily with a system motivated by the need to facilitate the participation in higher education of poor students.
Simply, many advantaged students seem to have been enjoying an excessive generosity from this rule, and its abandonment should be welcomed by those giving weight to basic issues of fairness.

In short, these youth allowance reforms should result in more effective and fairer targeting, a conclusion that seems to be understood by many commentators. There is the additional comforting point that these policy changes have clearly been motivated with due weight being accorded the evidence.

Bruce Chapman is from the Crawford School of Economics and Government at the Australian National University. He was a consultant to the 2008 review of higher education, which recommended most of the changes adopted by the Government.

This article originally appeared in The Australian on June 3 2009.

1. China’s rise and the importance of Australia-China youth dialogue
2. Financing the expansion of higher education in East Asia
3. The education game

NB: This article is from the Harvard College Economics Review, Winter 2008, Vol II, Issue 1.

By all accounts there are emerging problems with US College loans. Increases in tuition over the last decade or so have been well above the rate of inflation, and in 2007 tuition levels stood at around $12,000 and $25,000 a year for public sector and private colleges, respectively.

US students taking out loans to pay tuition and to help survive may end up with very large debts, even of the order of more than $100,000. This has the unfortunate implication that for some graduates it is not feasible to take relatively low paid jobs because the size of their student loan repayments makes such employment hard to afford.

As reported by Mark Huffman in ConsumerAffairs.Com (March, 2007), ‘Why Does College Cost So Much?’, labor economist Ronald Ehrenberg shares that concern and thinks it might unduly influence a student’s choice of career. Huffman reports Ehrenberg as saying: “I am very much concerned and worried … that it may preclude students from entering socially important but low-paying occupations”.

The US problem seems odd to outsiders. In Australia, for example, the repayment of loans for tuition does not have this kind of trouble because the loans are repaid not on the basis of a set amount each time period, but instead depend on a graduate’s capacity to repay. This is a concept known as “income contingent loans”, the intellectual basis of which derived from the related work on graduate taxes from the late influential Chicago economist, Milton Friedman, and whose idea is pretty much ignored in the country of its origin. James Tobin designed a scheme for Yale University in the 1970s, but it ran into trouble because of collection difficulties.

Australia led the world by introducing income contingent loans (ICLs) for higher education in 1989 paid through the income tax system. The system, known as the Higher Education Contribution Scheme (HECS) works as follows: when students enrol in college (in the English tradition, known as university) they may elect to pay their tuition at the point of entry, or they can agree to repay later (with a surcharge) in a way that depends on their future incomes. The system covers all Australian students.

To illustrate how it works, consider what occurs when a student enrols in a four-year liberal arts degree program and incurs a total debt of approximately $30,000. After she graduates she is unemployed for a few months and at that time her HECS repayments are zero. Later she gets a job which pays her $35,000 for the first year and for that period she also repays none of the debt. In the second year she gets a promotion and then earns $40,000 a year and starts to pay off her debt because $40,000 is the first income threshold of repayment. She will repay a fixed percentage of her income to reduce the debt until it is completely repaid.

If at any time the student’s income falls below $40,000 a year (for example, by losing her job and becoming unemployed again), she repays none of the debt during that period. The difference for the student in the Australian system compared to the US college loan system is that in the latter she would have to repay a set amount of her loan no matter what her income is in the future.

Like all college loan systems, HECS was designed to remove the financial barrier for students having to find money to pay tuition on enrolment. But the difference between HECS and the US system of loans is that HECS offers protection against adverse circumstances, such as unemployment or low income employment. The problem expressed by Ron Ehrenberg with respect to the US system cannot happen in Australia because if the pay is low there are no or very low repayment obligations for the graduate.

There are other advantages with the Australian ICL system because students face an important default issue. This problem may manifest itself in a student’s reluctance to borrow for fear of not being able to meet future repayment obligations and thus being obliged to default on loan repayments. These concerns imply that there will be less borrowing than there would be in the absence of this default apprehension.

A reluctance to borrow due to the uncertainty of repayment constitutes what might be labelled an ex ante default problem for prospective students. There is also an ex post problem, which is that a proportion of those students who took the credit risk of borrowing for a human capital investment will end up not being able to repay because of low incomes. In these circumstances default imposes a potentially large cost on those unlucky borrowers who do poorly in the labour market. Significantly, research suggests that members of the default group in the US are predominantly those who ultimately experienced relatively high unemployment rates and relatively low earnings.

The critical summary point is that ICL offer students insurance of two forms. One, insurance against the hardships associated with repaying a set amount of a loan even if the hardship occurs at a later stage in the student’s future career trajectory. And two, insurance against default.

It is of interest to note that, in 1993, the Clinton Administration introduced broadly based reforms to student loan programs along the lines of an ICL, but these reforms have not worked well. One reason is that the policy design was very complicated and did not have a sensible income contingent basis. The take-up has been very low, and surveys reveal that most students have not heard of the scheme. In other words, there remains an important need in the US for a change in an ICL direction.

The success of HECS has encouraged a quiet international revolution in college loans, away from the US-style and towards the Australian. An ICL very similar to HECS was introduced in New Zealand in 1991, in South Africa in 1991, in the UK (partially at first in 1997 and now in full swing), in Thailand in 2007 and is planned for Israel in 2008.

It seems from a distance that US college students are being left behind in terms of international reforms of loan arrangements. ICL offers distinct advantages over current US approaches, and given the demonstrated success and fairness of these systems in other countries, the time seems right to debate the issue in the US.

1. Paying for higher education in Thailand
2. Financing the expansion of higher education in East Asia
3. Principles for reforming higher education in Australia: is Bradley brave enough?

Making a higher education financing system work that seeks to recoup a significant part of the investment in higher education from individual beneficiaries requires the fiscal infrastructure to collect debts, through lending agencies or the tax system. A big question then is whether a country has these capacities for implementing and administering a student loan or higher education financing scheme. Countries need strong political support which is long term, enough bureaucratic capacity to ensure an effective administration and widespread public acknowledgement of the need for a higher education system and private contribution to its financing.

In this month’s EABER Newsletter Peter Drysdale and I argue that country specificity is important in the design, implementation and ultimately, the effectiveness, of higher education financing schemes. If Thailand were to implement a scheme similar to that in Australia or New Zealand, for example, it would be unlikely to generate either the same outcomes or the same level of debt repayment unless there were a raft of complementary reforms in the fiscal or social security system. One of the reasons for this might be that local incomes are not high enough in Thailand to allow for sufficient rates of repayment. But another critical reason has to do with the capacity to collect.

In principle, income contingent loans for individual financing of higher education, repaid though the tax system when an appropriate income threshold is reached, are the preferred scheme for financing higher education. But in some countries the institutional framework might not be sufficiently robust to allow efficient, workable, collection of income contingent loans. If this is the case, a productive policy strategy might involve improvements in public sector management.

The Australian case offers some useful insights into the application of higher education financing in East Asia, although it would be wrong to suggest that income contingent loans schemes are a panacea for all the challenges to financing higher education funding. There are many difficulties in design as well as other problems beyond the design of income contingent loans schemes that need to be part of effective strategies for funding higher education in East Asia and elsewhere.

1. Paying for higher education in Thailand
2. Larry Summers on higher education and development
3. Principles for reforming higher education in Australia: is Bradley brave enough?

My not so serious take on the 2020 Summit is in this quarter’s Agenda Magazine:

My guess is that 100 per cent of participants in the 2020 Summit, including myself, didn’t really know what to make of it beforehand. My guess is that 70 per cent of participants in the 2020 Summit, including myself, didn’t know what to make of it during the summit weekend. My guess is that a large minority of participants in the 2020 Summit, including myself, still don’t really know what to make of it.

Beforehand

When the summit was announced, the first issue concerned how best to get yourself invited. I knew that as a slightly post-middle-aged pink male I did not have the best demographics, so I would have to try some cunning tricks. The direct approach seemed a little tacky (‘Hi Glyn, I was just in your office and wondered how the selections were going for the summit?’) but there was some potential to be had in that we were required to propose some referees, and I had agreed to play this role for four colleagues. Judicious use of refereeing language would ensure that I could free up three or four of these places for my application. I planned a few highly supportive and subtly damning responses to the refereeing invitation. For example: ‘Professor A is a brilliant economic theorist and has extraordinary talents in the use of mathematical lemmas and differential equations that are bound to be useful to an informed policy discussion with laypeople and the media.’ [Professor A was chosen for the Summit]

Preparation

We were asked to write 100 words on our wonderful idea, and also 100 words on something in public policy we had changed our minds about in the last 10 years. In the first category I suggested that income-contingent loan mechanisms were a fantastic and innovative instrument for solving all of the world’s problems, such as for the financing of paid parental leave and drought relief, the collection of low-level criminal fines, and much more. This didn’t take 100 words so I then added that income-contingent loans would eliminate terrorism, resolve global warming, secure world peace (quite soon), and provide the key to immortality. That should get their attention.

Finding something that I had changed my mind about was harder, and I noticed that several of my colleagues responded to this question by saying ‘Nothing’. For this second category I wrote something like: ‘I used to think that income-contingent loans couldn’t solve all of the world’s problems, but now I realize that they can.’ I reckoned a bit of a consistent theme would maximize my chances of getting this up at the summit. [Editor’s Note: Professor Chapman got nothing up at the Summit.] [Editor’s Note: The ‘Editor’s Notes’ in this contribution are not the editor’s notes]

At the summit

Among the thousands of words that could be written about the actual summit are: chaotic; engaging; chaotic; enlightening; chaotic; exhilarating; and chaotic. I was in the so-called Productivity Panel, which turned out to be less productive than I hoped for. This has nothing to do with my profound disappointment, indignation, resentment and bitterness about my brilliant idea, that income-contingent loans could solve all the world’s problems, being ignored. [Editor’s Note: On the contrary, his idea being ignored has everything to do with Professor Chapman’s judgment that his panel was unproductive.]

Several days before we arrived it was clear that the organisation, effort and planning differed hugely between the Panels, with the Governance Panel apparently having been manipulating, settling issues and signing agreements since the last major Labor summit of April 1983. On the contrary, members of my panel had no idea if we would even be in the same room, or where Parliament House was. It turned out that there were to be four sub-panels in the Productivity group, of about 25 people each. In other Panels, such as the Indigenous Policy group, there were around 10 sub-panels of about 10 each, and in the Economy Panel there were around five sub-panels, including a breakaway group that wanted to talk about other stuff.

What happened in the sub-panels seemed to be completely different, even within the broad groupings. It became very apparent, with 2020 hindsight [Editor’s Note: Professor Chapman stole this joke from Professor Ann McGrath], that the quality of the facilitator and the rapport between group members were both completely important to the worth of the process. In my group the facilitator seemed not to understand the area much at all, which was completely obvious because she could not see that income-contingent loans would solve all the world’s problems. Further, in this group we didn’t have rapport as such; more like antipathy, combativeness, hostility and self-promotion. Amazingly, I was the only one to focus properly on the critical idea, that income-contingent loans would solve all the world’s problems. [Editor’s Note: It has been reported by other members of this sub-panel that when it became obvious that Professor Chapman was a fanatical self-obsessed zealot they decided to discuss issues outside his interests and expertise, and of these there were a very large number.]

What became part of the Productivity Panel’s final list of ideas was a combination of opportunity, timing and mystery. The idea that got most media attention was that HECS debts should be reduced through community work, yet I have found no-one in my Panel who remembered that this was discussed. On the ABC’s The World Today the following Monday, Warwick Smith, who co-chaired our panel with Deputy Prime Minister Julia Gillard, essentially said that indeed this idea wasn’t part of the Productivity Panel’s deliberations. Those ideas which did make it seemed to come from people being able to seize the moment with a compelling sentence (with a short and punchy justification) which was then not opposed.

After the summit

We all needed to recover from the turmoil and excitement which came from being included in what was in essence a very large public-policy jamboree and party. I have been in discussion with many colleagues since, and for these economists there is an emerging consensus about the Summit:

• It was invigorating to be there;

• We got most out of meeting other Australians interested in public policy from outside our fields;

• The all-inclusive sessions, with the 1002 ‘Summiteers’, many politicians and the media, were not generally a good use of time for those wanting to develop policy issues; and

• Non-economists don’t like us much because what really matters in terms of public policy are issues of fairness and equity.

I was initially quite disappointed in the absence of much informed debate and the significance placed on the snappy one-liner, but my consulting of the Shorter Oxford Dictionary has helped me come to terms with this: ‘Idea’ is defined as ‘vague belief or fancy’. [Editor’s Note: Professor Chapman’s opinion that income-contingent loans can solve all the world’s problems seems to sit quite comfortably with this definition.]

Through the haze, confusion, and general positive feel of the Summit, there were naturally some memorable moments. The best example for me from the Productivity Panel entails all the members of one sub-group being asked at the death knell to state in a few words or less their one brilliant idea. Joshua Gans of the University of Melbourne, tongue firmly in cheek, sang out: ‘Put an Australian on Mars by 2020!’ A graver economist noted that ‘would be very expensive’. Joshua retorted: ‘We don’t have to bring them back!’

Boring it wasn’t.

1. The Australian Defence Force and Timor-Leste: looking toward 2020
2. Financing the expansion of higher education in East Asia
3. How might China achieve its 2020 emissions target?