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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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