Four (or more…) problems with student loans

There has been a disturbance in the force? Do you feel it? The opening words of the trailer for the much awaited new Star wars movie might as well describe how the ground seems to be shifting on higher education funding. We seem to be moving towards a student loan model, although there is zero chance of anything remotely as contentious as that being announced this side of an imminent general election.
A recap: higher education student fees for first time undergraduate EU students were scrapped in 1996, at the behest of the then minister for education, Niamh Breathnach.  The notion that “fees were scrapped” is thus already a mistake. There are some 173000 fulltime undergraduates students in the HEA system; of this 14200 are NonEU, and thus are almost certainly paying full fees. In addition, a proportion of the remainder will be repeating years, or taking second undergraduate degrees, or will otherwise be not eligible. So we can surmise that fees were abolished for about 90% of the undergraduate student body. These students also pay the myriad of registration charges, exam charges, registration charges and so forth as do the ‘free fees’ students.  At postgraduate level fees are charged, with rare exceptions of particular courses where the state deems a critical skill gap to exist. There are just under 37000 postgraduate students the vast majority of whom pay fees, and then we have some 20000 parttime undergraduates who mostly also pay fees. So, of the total student body of some 230000 we have up to 1/3 who are paying fees.

Free fees are a myth on the broad sweep of the data. Second we have seen absolutely no evidence that the abolition of fees for a cohort of persons has had any measurable effect on the participation of persons from lower socioeconomic groups.  There is abundant research on this, and one of the main reasons for abolition was to ensure greater participation.  We now have an environment where for all higher education, compared to 2008, student numbers are up by 12% but overall spend per student is down by nearly 20%. Everybody agrees that this in the long run is both self defeating and unsustainable

So now what? This government has seen two commissions on education finance. The leaks and noises from the Cassells group suggest that they are enamoured of a student loan system. This would be income contingent, similar to the Australian model. People would begin to pay back their loans only on attaining a certain income level, and there would be below market interest rates.

Several problems arise with this.

First, Australia has grappled with the issue of migration, but it pales into insignificance compared to here. Graduates are mobile, and they move. Especially when things are sticky here, graduates move. How will we recoup the loan payments from higher earning graduates living in the UK or Germany?

Second, what sort of a burden will the loans place on people? Bruce Chapman, the Australian expert on student loans, suggests that these would be low, with a repayment burden of 10-15% of income. While in and of itself quite bearable, there is a problem here. First, the repayment burden as a % of income will, by his models, be considerably higher on those in lower earnings. See the charts below (adapted from here) for the repayment burdens on persons earning in the 25th and 50th percentile of income.  This of course assumes also that people leave directly after college, and get a job, and stay in it.  The two charts are for fees only, assumed to be on average €6000 and for fees plus maintenance.



Within loans we have a second issue; the issue of student loans cannot be treated in isolation.  A loan with a repayment burden of say 20% of income has to be financed somehow. While repaying this loan the twentysomethings will also have to live somewhere. That requires renting, while also saving for a home if they are the normal Irish couple. Can twentysomethings take on this burden? Nowhere that I have seen has the whole scope of probable borrower repayments been modelled? A large part of the underlying problem of the GFC was that the joint probabilities of default across baskets of securitized assets were either ignored or grossly underestimated. We should have learned that nothing happens in isolation – monies spent by people repaying student loans is money that cannot be spent on rent, on savings, on consumption etc.  What will happen when, as is inevitable, people step out of the earnings market – how will the system handle maternity leave, how will it deal with unemployment etc? will the clock stop, will there be an interest holiday (and who will pay for that), will the interest clock up at a lower rate, will the term for repayment be extended, will people be required to take out Student Loan Insurance… so many questions.

Third, who will administer them? SUSI? We have, as you may have noticed, a banking system that is only now and only barely returning to some degree of operating effectiveness.  Any banking system that would take on these loans would require significant state guarantees. Can you imagine any minister standing up and, no matter how sensible it might be, saying “we are guaranteeing banks loans”.  For banks or the private sector to take on this would be possible only if we were to go a route suggested by at least one US university and have students contractually indentured to a venture capital company. But what venture capital company will fund arts or social science degrees over de jure sexy and “market focused” degrees?

Fourth, when there is a guarantee, there is moral hazard – yes, its not just for mortgages. From the bank perspective the loan will be repaid by the taxpayer if the borrower defaults. From the borrower, where is the recourse? We cannot repossess fixed assets still less can we repossess human capital. So the only way that this would work would be to have the revenue collect the tax, sorry, loan repayments, from the wages and salaries. So we will have the revenue collecting a tax, the state guaranteeing the loan, the funds going to the higher education institutions who are under the control and management of the HEA and the Dept of Education. We are putting in layer after layer of quasi-private sector nodes into what is in essence a state service. Why? Ideology?

Fifth, what of non completion? Higher education is a step up from school. No matter how low a bar is set some will not find themselves able to get over it. People fail college. People should fail college. A barrier that is permeable to all is no barrier. HEI’s can do so much but in the end some people simply are not able for the work, intellectually  or interpersonally. That doesn’t make them bad people, just those for whom the system is not optimal.  And then there are those that find that the course is not for them. A mature decision to drop out and restart in a course that better suits ones skills is to be applauded. In both these cases rather than graduating with three or four years of student debt we will find people graduating with five, six, seven years. That seems not to have been modelled.

This process to me reflects a misunderstanding of what higher education produces. Goods can be of various types. We can classify goods by two dimensions. Can we exclude someone from enjoying it if they dont contribute, and does my enjoyment of the good prevent you from doing so? Are they excludable and are they subtractable or rivalrous, in economic terms.

people who haven’t paid?
Yes No
Does my consumption
reduce the amount for you
to consume?
Yes Private eg a cinema ticket Common-pool eg fisheries and forests
No Club eg software Public eg national defence

In general economists and regulators agree that Private goods are best provided by the market and paid for by individuals; public goods are provided by state or legal monopolies and paid for by taxation. The other two are more complex. Software for example is generally paid by individuals and its usage regulated by laws, while common pool issues give rise to complex considerations on restriction of overuse to avoid the tragedy of the commons. A mixture of private and public provision and payment is the usual outcome.

What then of higher education? First, there is a generally accepted view that a more educated population is one that is ‘better’. Higher levels of education are associated with better socioeconomic outcomes, health status etc. There is thus an element of a public good in that product and thus public provision is optimal. Second however there are individual benefits beyond that – some forms of higher education give rise to higher and better quality outcomes than other. In that context we have two elements. We again have a public good, the increment from the base public good of even better health and socioeconomic attainment ; and we have a private good, the ability of the individual to hire themselves out for higher earnings. But that private good is already captured by tax. Higher earnings, higher tax. We can argue about where and on what level tax is levied but that it exists we dont disagree. There are other forms of goods produced. Some higher education product is a network a pure form of club good. Again, the externalities of the good, the increased benefits, are captured by either reduced spending on health for the network members or by increased taxation on their earnings.

We can disaggregate further but the principle is, I think, clear. Until we determine WHAT is is we are producing from higher education it is a major error to determine HOW we should pay. A loan scheme presupposes that the good is mostly private. A free fees for all presupposes it is mostly public. The reality is it is both, at once. Mechanisms (again, tax…) to capture the increased private good benefit already exist. The problem is that they are not being cycled back to the producer to ensure continued creation of same, at least not by comparison with others.


An extended version of a column in the Irish Examiner 5 December 2015


5 thoughts on “Four (or more…) problems with student loans

  1. Pingback: Ninth Level Ireland » Blog Archive » Four (or more…) problems with student loans

  2. David Watts

    Predictions: fees under a loan system will be set at the current level or worse due to the unpopularity of the scheme. No money will be saved as loan system is as expensive as current one (UK experience). System limps on as expanded intake is underfunded. Successive politicians launch campaigns/committees to get to the bottom of ‘waste’ of money in higher education system. They fail.

  3. Pingback: Four (or more...) problems with student loans |...

  4. Pingback: The Economic Logic of Student Loans (or, not..) | Brian M. Lucey

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