Student Loan Programs Alternative Financing For Higher Education

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Student Loan ProgramsAlternative Financing For
Higher Education

• Harry Anthony Patrinos
• April 1999

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Benefits of Education

• Returns to education
• Returns to higher education
• Productivity
• Government revenue (taxes)
• Externalities
• Private
• Social

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Financial Problems of Higher Education

• Overcrowding-declining quality
• Growing demand-limited access
• Limited resources
• Need for alternative sources of finance

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Need for Additional Resources

• Government budget-limited
• Efficiency gains, savings
• Diversify resource base with external funds

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Generating Funds for Higher Education

• 1. Charge tuition
• 2. Reduce students' living allowances
• 3. Private sector development
• 4. Student credit
• 5. Graduate tax

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Generating Funds for Higher Education (Contd)

• 6. Work-study or national service programs
• 7. Business sponsorship of students
• 8. Consultancy, applied research
• 9. Sale of goods and services
• 10. Private donations

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Need for Additional Resources

• Government budget-limited
• Efficiency gains, savings
• Diversify resource base with external funds

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Need for Additional Resources

• Government budget-limited
• Efficiency gains, savings
• Diversify resource base with external funds
• Primary beneficiary students

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Private Funds

• Family resources
• Student earnings
• Students future earnings

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Cost Recovery

• Increase efficiency
• Enhances equity
• Expands source of revenue

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Equity Issue

• What if qualified students cannot pay?
• Student credit

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Student Credit

• Demand-side
• Risks to borrower
• Supply-side
• Risk to lender
• Information risk
• Students know likely outcomes, lenders do not
• arts or arbitrage (Barr)

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Student Loans

• Mortgage-type specified time period, fixed
  payments
• Problems
• Harms access
• No additional resources for university
• Costly
• Defaults
• No private funding

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Alternative

• Income contingent student loan

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Income Contingent Student Loan

• Enables students to defer payments until they are
  working
• Allows needy access to higher education

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Reforming the Funding System

• Share costs
• Minimize deterrent effect on poor
• Benefit adults and young
• Income contingent repayments
• Payments equal cost of loan
• Payments over lifetime
• Minimize default
• Loan not public expenditure

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Improving the Performance of Deferred Payment
Programs

• Student loan programs should be targeted
• Hidden subsidies limited
• Likely pattern of graduate earnings taken into
  account
• Program management by banks

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Student Loan ProgramsAlternative Financing For
Higher Education

• 30 April 1998