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Necessity of income-contingent higher education loan in Bangladesh

| Updated: April 23, 2020 21:37:26

Necessity of income-contingent higher education loan in Bangladesh

Bangladesh is growing rapidly - at one of the fastest rates in the world. The country's rapid progress, among others, will lead to a rapid rise in the demand for university graduates and consequently the demand for higher education. Inability to create the opportunity to avail higher education for interested and qualified students will hamper the growth prospect of the economy. Because of the complementary nature of the role of the state and the market, it is important to coordinate the effort of the public and the private sector to cover any potential gap between the demand and supply of tertiary-educated workforce.

It is a very popular view in the country that the state shall provide the costs of higher education for the students. The argument is that the private cost will not allow a large proportion of low-income students to undertake tertiary education. While this is partly true, there are two other sides of the argument. First, students from low-income background have a low intake of university education compared to their middle-class counterparts. And therefore, it is the latter group which is essentially in favour of the free university education. Second, Bangladesh, still being a lower-middle-income country, suffers from the fiscal pressure to finance tertiary education. In fact, currently, the government is financing the operation of a large number of universities from public sources (42 public universities according to MoF, 2019). As a result, the public fund for higher education is thinly distributed over a large number of tertiary institutions resulting in overall lower-quality graduates in the country. A third problem from the public side is that a significant number of students availing free tertiary education, migrate overseas, sometimes permanently. Thus, the country that finances their education does not benefit from such spending.

Does this mean that government will only regulate the sector (with a body like University Grants Commission, UGC) while the university education should only be provided by the private universities in which the students need to pay the tuition on their own? What will happen then for talented students from a low-income background? It may be the case that such students could be forced to sell their assets and/or borrow money from local lender/relatives with a high-interest rate. Such news is not very uncommon in our newspapers and social media and recognised in the current five-year plan of the country (SFYP, 2015). In the worst possible case of no opportunity of selling assets or borrowing, they can be pushed out of the higher education sector, falling into the trap of a vicious cycle of poverty.

One potential solution can be achieved through the private loan market (banks) which will lend money to good students knowing that they will be successful in the job market and would start to repay the loan as soon as they start earning. The problem is that they may not have any collateral and there can also be uncertainty associated with the loan refund since it may take a long time for students to start earning.  Thus, the banks may not be willing to lend money to prospective borrowers (students) resulting in a market failure in the education market. Consequently, the low-income background students may fail to manage their tuition fees due to credit constraint in the private education market.

One solution can be the government guarantee for education loans for university students. Students can judge their capacity to complete the tertiary education and then earn enough money in the job market to repay the loan. Such provision will encourage students to take higher education which will not only boost the private education market, including universities but would also move the country towards a knowledge-based society. Overall, the positive spillover effect of education may put the country into a higher growth trajectory.

However, there are two potential problems with the simplified government guarantee for education loans for university students. First, students may misjudge themselves and believe that they will be unable (or able when in fact they are not) to repay the loan by earning enough. As a consequence of the risk, low-income background meritorious students can particularly lose their interest in higher education as they may not know much about the education and job market, because of their background. This will have a negative effect on the country's growth and poverty situation. Second, the volatile job market may not always allow graduates, without their own fault, to earn enough money to repay the loan. When graduates fail to earn enough but are forced to repay the loan after graduation and getting a job, their consumption may actually fall. This possibility can have severe negative consequences on the quality of life of the graduates (or unsuccessful students who borrowed but failed to graduate).

Both of these problems can be avoided when the borrowing is income-contingent - the students (borrower) can avoid the risk of reducing their living standard significantly as they only need to repay when they are successful in the job market and earn above a threshold amount set by the government.

Australia set an early example in solving the problem of financing tertiary education by initiating Australian Income Contingent Loan (ICL), formally known as the Higher Education Contribution Scheme (HECS). HECS type education finance mechanism solve the market failure by a government guarantee for providing student loan. Bruce Chapman, a professor at the Australian National University (ANU), was the initiator of the important public policy in Australia. Bruce designed the HECS system with the minimal administrative burden that allowed Australia to increase university enrolment domestically with a low fiscal burden. The development of various policies following HECS, both in Australia and internationally, indicates the success of the policy (Chapman 2018).  The system is good enough making some people believe that an Australian-style HECS loan system would solve America's student debt problem (Dodd 2020).

Thus, Bangladesh should introduce a HECS type tertiary education finance mechanism. If properly tracked and administered, in addition to the benefits mentioned above, Bangladesh can get loan refund from overseas migrating students as it would be a legal liability for them to repay the loan. The arrest of returning defaulters of education loan is not uncommon in the countries having such provision. For example, in New Zealand, the number of arrests for such reason was 3 in 2016, 1 in 2017, 2 in 2018, 2 in 2019 and 1 (so far) in 2020 (Jones 2020). It can be noted that with a sound computerised national ID and passport mechanism relative to the standard of a developing country, Bangladesh is better equipped to track students with overdue education loans, both domestically and overseas.

Income contingent education finance mechanism having government guarantee will reduce the fiscal pressure on the country by reducing direct finance need for higher education sector. It may also allow the country to build high-quality tertiary institutions with public ownership through a concentrated distribution of the public fund.

In a recent piece, Banerjee & Duflo (2020) discussed that the true determinants of growth are unknown and therefore, the developing countries should rather focus on getting rid of the resource waste. Addressing similar issues may not boost long-run growth permanently but will improve the quality of life in the economy, particularly for the poor. Therefore, the best strategy for developing economies is to use the resources directly to raise the living standards of the poor. A HECS type mechanism will allow the government to channel the saved resources from the higher education sector to the identified areas which will eventually help the country to grow faster and reduce poverty.

Syed Hasan is with Massey University, New Zealand


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