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Dr. Dung Doan Australian National University Brasilia, 10 th - 12 th 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

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  • 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 43,346,3 44,9 41,9

    37,643,4 40,4

    45,1 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

    wer

    s

    Loan

    take

    -up

    rate

    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