Student Loan Programs

Alternative Financing For Higher Education

Harry Anthony Patrinos

April 1999

Benefits of Education

Returns to education

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

Financial Problems of Higher Education

Overcrowding-declining quality

Growing demand-limited access

Limited resources

Need for alternative sources of finance

Need for Additional Resources

Government budget-limited

Efficiency gains, savings

Diversify resource base with external funds

Generating Funds for Higher Education

1. Charge tuition

2. Reduce students' living allowances

3. Private sector development

4. Student credit

5. Graduate tax

Generating Funds for Higher Education (Cont’d)

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

Need for Additional Resources

Government budget-limited

Efficiency gains, savings

Diversify resource base with external funds

Need for Additional Resources

Government budget-limited

Efficiency gains, savings

Diversify resource base with external funds

Primary beneficiary: students

Private Funds

Family resources Student earnings Students’ future earnings

Cost Recovery

Increase efficiency Enhances equity Expands source of revenue

Equity Issue

What if qualified students cannot pay?

Student credit

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)

Student Loans

Mortgage-type: specified time period, fixed payments

Problems Harms access No additional resources for university Costly Defaults No private funding

Alternative

Income contingent student loan

Income Contingent Student Loan

Enables students to defer payments until they are working

Allows needy access to higher education

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

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

Student Loan Programs

Alternative Financing For Higher Education

30 April 1998