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Wellington Group Exchange Session G: Financial Crisis – What does this mean for Higher Education?. Reflections on Student Loan Schemes Bruce Chapman Crawford School of Economics and Government Australian National University. Outline. 1 Why Loans Schemes are Needed

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Wellington group exchange session g financial crisis what does this mean for higher education
Wellington Group ExchangeSession G: Financial Crisis – What does this mean for Higher Education?

Reflections on Student Loan Schemes

Bruce Chapman

Crawford School of Economics and Government

Australian National University


Outline
Outline

1 Why Loans Schemes are Needed

2 The Differences Between Loans Schemes: Bank Loans with a Government Guarantee

3 The Differences Between Loans Schemes: ICL

4 The Critical Role of Risk Management in an Uncertain World

5 The Spread of ICL

6 Loans Schemes in Trouble: Mortgage Based

7 Conclusion


1 why loans schemes are needed
1 Why Loans Schemes are Needed

  • Market failure in an uncertain and risky world:

    • human capital investment is uncertain (not finish, wrong subjects, future labour market)

    • no collateral for a bank

    • Government intervention is needed


3 bank loans with a government guarantee
3 Bank Loans with a Government Guarantee

  • Solves the bank risk problem

  • Provides finance easily

  • But: student risk remains

  • And: repayment hardship exists



4 advantages of and problems with icl
4 Advantages of, and Problems with, ICL

  • Provide consumption smoothing

  • Provide insurance against default

  • Allow decreases in government expenditure

  • BUT, major design issues: adverse selection (big) and moral hazard (smaller)

  • Collection, collection, collection


5 the critical role of risk management in an uncertain world
5 The Critical Role of Risk Management in an Uncertain World

  • Understanding government as a risk manager: the Moss contribution

  • ICL as a risk management tool

  • The pervasiveness of uncertainty: the current financial crisis the best example


6 the spread of icl
6 The Spread of ICL

  • Yale, 1974 (discontinued)

  • Australia, 1989, extended in 2001, 2005 and 2007

  • New Zealand, 1991

  • South Africa

  • Chile 1994

  • US (sort of), 1994

  • UK, 1997, extended 2007

  • Hungary, 2001

  • Ethiopia, 2001

  • Thailand, 2007 (suspended)

  • Under active consideration in Israel, Palestine, Colombia, Germany and Ireland


7 loans schemes in trouble mortgage based
7 Loans Schemes in Trouble: Mortgage Based

  • Defaults will Increase with Mortgage based systems

  • No defaults with ICL

  • Countries in Relative Trouble: the US and Canada

  • Countries more protected: NZ, the UK and Australia


Conclusions
Conclusions

  • Market failure means that student loans schemes are needed

  • Bank loans solve half the problem only

  • ICL are a risk management instrument

  • There has been a significant international reform with the spread of ICL

  • High financial instability a problem for mortgage based systems


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