Dr. Dung Doan Australian National UniversityBrasilia, 10th - 12th July 2019

ICL experience outside Australia and the UK: Customized design or over-complication?

International Conference on Income-Contingent Financing: Alternatives for Higher Education and Beyond

Desirable characteristics of ICL system

Coverage, i.e. eligibility, is not mean-tested

Collection through employer with-holding of contemporary income

ICL is the only loan option to avoid the situation where only students expecting low income choose ICL

Loan limit and/or fee and quality regulation needed for private higher education institutions

The diversity of ICL design and design-related issues

New Zealand: gentle to debtors but costly to government

Hungary: tough on debtors and inefficient collection

Japan: small coverage, choices between ICL and TBRL reduce government revenue

South Korea: mean-tested coverage, inefficient collection, no loan limit for tuition fee

New Zealand: Student loan system

39,7 43,3 46,3 44,9 41,937,6

43,4 40,445,1 44,1 44,8

1,9 2,0 1,9 1,9 2,0 2,10

10

20

30

40

50

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Cent

s pe

r dol

lar l

ent

NZ Costs of lending

Subsidy rate Administrative cost

Tuition fee introduced in 1989. ICL introduced in 1992. Closest resemblance to the Australian system, but gentler on debtors and

more costly for government – high subsidy mostly due to zero interest rate Low administrative cost thanks to efficient collection through employer

with-holding The median NZ-based debtor pays off her debt in 6.8 years.

New Zealand: Issues and Challenges

Design issue: zero interest rate is the major cause of large subsidy Contextual issue: collection from overseas debtors (mostly in

Australia). Overseas debtors account for 74% of those with overdue

repayment, and 91% of overdue amount as of 2017/18 Some mitigating measures:

Agreement with the Australian Tax Office for loan collection Tax authority can

initiate bankruptcy procedures in an overseas court for overseas debtors becoming bankrupt in NZ

arrest debtors with major non-repayment when they return to NZ apply for garnishee orders on overseas income

Hungary: Student loan system

Loan 1 introduced in 2001 to cover only living costs

Loan 2 introduced in 2012 for tuition fee to boost enrolment and help HEIs sustain revenue after a public squeeze on HE funding and its consequential reduction in no. of state-funded spaces

Although managed by a government institution (Student Loan Company), this system relies on private funding. Fund is channeled directly from capital market lenders through

SCL to borrowers subject to credit crunch during financial crises.

Hungary: Issues and Challenges

Contextual issue: weak income tax system, thus difficult collection

Design issues: Debtors must repay even if unemployed Repayment is based on income 2 years earlier Fail to insure debtors against adverse employment outcomes

Repayment rate of 6% of income: simple but not progressive when interest rate is positive since high-income debtors repay faster and thus, pay less interest than low-income debtors.

No automatic collection. Debtors must make repayment to tax office by themselves inefficient

Hungary: Issues and Challenges (cont.)

Design issues:

Defaulters must pay all outstanding debt in lumpsum within 8 days. Default if failing to repay 12 monthly instalments or “serious breach of

contract (e.g. failing to communicate the change of name or permanent address of residence)”

Interest rate penalty for late repayment. Repayment information can be released to other financial

institutions and, thus, can damage debtors’ credit reputation.

Complex and heavy penalties undermine insurance feature of ICL and increase administrative cost.

Japan: Student loan system

Two TBRLs covering about 38% of university students Type 1: interest-free, issued based on academic merit and financial needs Type 2: positive but negligible interests, issued based on financial needs

An ICL scheme was introduced in April 2017, only to Type 1 borrowers Debtors choose between the ICL and TBRL schemes before graduation. After graduation, debtors can change from TBRL to ICL once, but not the

other way around. If a low-earning graduate debtor under the ICL scheme has a high earning

partner, they are put back on the TBRL scheme.

Japan: Issues and Challenges

Design issues: Limited coverage (approx. 14% of university students) Borrowers can choose between ICL and TBRLMost ICL borrowers

are those expecting low earnings Debtors must repay even if unemployed Repayment rate is based on past income

Contextual issue: A large proportion of female graduates drop out of full-time

employment and earn very low income after marriage/childbirth Potential measures to boost collection from female debtors

Repayment rules based on household income Set first income threshold low so that most female debtors can repay

a big chunk of their debt before getting marriage

Fail to insure debtors against adverse employment outcomes

South Korea: Student loan system

Introduced in 2009/10 to replace a private, high-interest, government-guaranteed loan system

2 main loans: a TBRL and an ICL, both with academic merit requirements

TBRL: for undergraduate and graduate students from top 20% household income

ICL: only undergraduate students from bottom 80% household income

South Korea: Issues and Challenges

Design issues: Non-universal coverage, eligibility is mean-tested Repayment based on past income Employer with-holding is not automatic. Debtors have to choose

whether to enroll in employer with-holding arrangements biannually. No loan limit for tuition fee – loan size can be large for students at

private HEIs

Contextual issue: Approx. 40% of graduates below 30 years old have no income as they

prepare for exams to get public sector jobs. Evidence that young debtors receive support from family (mostly

parents) to repay their debts.

Main take-away messages

ICL can be flexibly designed to suit a country’s specific conditions (e.g. labor market characteristics, fiscal constraint, and administrative system).

A proper ICL design avoids features that Undermine the insurance against contemporary bad employment

outcomes Make debtors repay when they cannot afford it Cover only certain students since all graduates can get into trouble in the

future Make collection inefficient and costly

What NOT to do

New Zealand Hungary Japan South

Korea

Non-universal coverage x x

Borrowers can choose between TBRL and ICL x

Not collected through employer withholding x x x

Debtors must periodically re-apply to employer with-holding arrangement x

Repayment based on past income x x x

Repayment obligation in case of no-income x x

Penalty for late/non-repayment x x x

Default penalty exists x x

Thank you for your attention

Appendices

The diversity of ICL design and design-related issues

New Zealand: gentle to debtors but costly to government

Hungary: tough on debtors and inefficient collection

Japan: small coverage, choices for debtors reduce government revenue

South Korea: mean-tested coverage, inefficient collection, no loan limit for tuition fee

New Zealand: Current ICL design

Interest rate

Repayment rate

Debt collection

0% nominal for NZ-based debtors. 4.3% nominal for debtors staying overseas. Interest penalty on late repayment above NZ $334.

12% marginal for main job, 12% gross for all secondary jobs. Lower repayment rate for debtors earning above the threshold in total but working 2 jobs and the main income is below the threshold.

By tax office through employer-withholding.Self-employed debtors repay based on income upon tax return.

Coverage Universal coverage of all domestic students

Repayment threshold NZ $19,760 (pre-tax)

New Zealand: Student loan system

Tuition fee introduced in 1989. ICL introduced in 1992.

Closest resemblance to the Australian system, but gentler on debtors and more costly for government

0

40.000

80.000

120.000

160.000

200.000

240.000

280.000

320.000

0%

10%

20%

30%

40%

50%

60%

70%

80%

1992 1995 1998 2001 2004 2007 2010 2013 2016

No.

of n

ew b

orro

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s

Loan

take

-up

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New Zealand ICL take-up

Student loan take-up rate No. of new borrowers

Hungary: Current ICL design

Interest rate

Repayment rate

Collection

Loan 1: 1.99%, varying every 6 months, including risk and operation premium. Loan 2: 0%

Loan 1: 6% gross of min. wage in the first 2 years after graduation or if income 2 years ago below min. wage. Otherwise 6% gross of income 2 years ago; 8-12% if getting the loan before May 2012. Loan 2: depending on loan size, 4-11% of either min. wage or gross income 2 years ago

Debtors repay by themselves to tax authority.

“Forgiveness” None. Default debtors must repay all outstanding debt in lumpsum within 8 days. Interest rate penalty for late repayment.

Coverage Universal coverage of all domestic students (aged below 45)

Repayment threshold

Zero; minimum repayment amount is 6% of the minimum wage. Repayment starts 4 months after graduation.

Japan: Current ICL design

Interest rate

Repayment rate

Collection

0% during study period, 0.01% (variable) or 0.27% fixed after graduation

9% gross of taxable income of the previous year

Auto-deduction from debtor’s bank account

Coverage Only borrowers of Type 1 loan (approx. 37% of borrowers and 14% of university students in 2016)

Repayment threshold

None, minimum repayment amount is ¥2,000/month if gross annual income is below ¥1.44 million

South Korea: Current ICL design

Loan limit

Interest rate

Repayment rate

Collection

No limit for tuition fee. KRW 1.5 million/semester for living costs.

2.2% nominal in 2018

20% marginal of income of the previous year

Employer with-holding is optional and requires enrollment

Coverage Undergraduate students aged <35 from bottom 80% of household income, with satisfactory academic merit

Repayment threshold KRW 18.56 million/year