Wellington group exchange session g financial crisis what does this mean for higher education
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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. 1Why Loans Schemes are Needed

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Wellington Group Exchange Session G: Financial Crisis – What does this mean for Higher Education?

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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

1Why Loans Schemes are Needed

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

3The Differences Between Loans Schemes: ICL

4The Critical Role of Risk Management in an Uncertain World

5The Spread of ICL

6Loans Schemes in Trouble: Mortgage Based

7Conclusion


1 why loans schemes are needed

1Why 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

3Bank Loans with a Government Guarantee

  • Solves the bank risk problem

  • Provides finance easily

  • But: student risk remains

  • And: repayment hardship exists


Bank loans and student default risk

Bank Loans and Student Default Risk


4 advantages of and problems with icl

4Advantages 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

5The 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

6The 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

7Loans 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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