Wellington Group ExchangeWellington Group ExchangeSession G: Session G: Financial Crisis – What does Financial Crisis – What does

this mean for Higher Education?this mean for Higher Education?

Reflections on Student Loan SchemesReflections on Student Loan Schemes

Bruce ChapmanBruce ChapmanCrawford School of Economics and GovernmentCrawford School of Economics and Government

Australian National UniversityAustralian National University

OutlineOutline

11 Why Loans Schemes are NeededWhy Loans Schemes are Needed

22 The Differences Between Loans Schemes: The Differences Between Loans Schemes: Bank Loans with a Government GuaranteeBank Loans with a Government Guarantee

33 The Differences Between Loans Schemes: ICLThe Differences Between Loans Schemes: ICL

44 The Critical Role of Risk Management in an Uncertain The Critical Role of Risk Management in an Uncertain WorldWorld

55 The Spread of ICLThe Spread of ICL

66 Loans Schemes in Trouble: Mortgage BasedLoans Schemes in Trouble: Mortgage Based

77 ConclusionConclusion

11 Why Loans Schemes are Why Loans Schemes are NeededNeeded

Market failure in an uncertain and Market failure in an uncertain and risky world:risky world:

– human capital investment is uncertain human capital investment is uncertain (not finish, wrong subjects, future labour (not finish, wrong subjects, future labour market)market)

– no collateral for a bankno collateral for a bank– Government intervention is neededGovernment intervention is needed

33 Bank Loans with a Government Bank Loans with a Government GuaranteeGuarantee

Solves the bank risk problemSolves the bank risk problem

Provides finance easilyProvides finance easily

But: student risk remainsBut: student risk remains

And: repayment hardship existsAnd: repayment hardship exists

Bank Loans and Student Default RiskBank Loans and Student Default Risk

44 Advantages of, and Problems with, ICL Advantages of, and Problems with, ICL

Provide consumption smoothingProvide consumption smoothing

Provide insurance against defaultProvide insurance against default

Allow decreases in government expenditureAllow decreases in government expenditure

BUT, major design issues: adverse selection (big) BUT, major design issues: adverse selection (big) and moral hazard (smaller)and moral hazard (smaller)

Collection, collection, collectionCollection, collection, collection

55 The Critical Role of Risk Management The Critical Role of Risk Management in an Uncertain Worldin an Uncertain World

Understanding government as a risk manager: Understanding government as a risk manager: the Moss contributionthe Moss contribution

ICL as a risk management toolICL as a risk management tool

The pervasiveness of uncertainty: the current The pervasiveness of uncertainty: the current financial crisis the best examplefinancial crisis the best example

66 The Spread of ICLThe Spread of ICL

Yale, 1974 (discontinued)Yale, 1974 (discontinued) Australia, 1989, extended in 2001, 2005 and 2007Australia, 1989, extended in 2001, 2005 and 2007 New Zealand, 1991New Zealand, 1991 South AfricaSouth Africa Chile 1994Chile 1994 US (sort of), 1994US (sort of), 1994 UK, 1997, extended 2007UK, 1997, extended 2007 Hungary, 2001Hungary, 2001 Ethiopia, 2001Ethiopia, 2001 Thailand, 2007 (suspended)Thailand, 2007 (suspended) Under active consideration in Israel, Palestine, Colombia, Under active consideration in Israel, Palestine, Colombia,

Germany and IrelandGermany and Ireland

77 Loans Schemes in Trouble: Loans Schemes in Trouble: Mortgage BasedMortgage Based

Defaults will Increase with Mortgage Defaults will Increase with Mortgage based systemsbased systems

No defaults with ICLNo defaults with ICL Countries in Relative Trouble: the US Countries in Relative Trouble: the US

and Canadaand Canada Countries more protected: NZ, the Countries more protected: NZ, the

UK and AustraliaUK and Australia

ConclusionsConclusions

Market failure means that student Market failure means that student loans schemes are neededloans schemes are needed

Bank loans solve half the problem onlyBank loans solve half the problem only ICL are a risk management instrumentICL are a risk management instrument There has been a significant There has been a significant

international reform with the spread of international reform with the spread of ICLICL

High financial instability a problem High financial instability a problem for for mortgage based systemsmortgage based systems