Income Contingent Student Loans for Thailand: Alternatives Compared

In Thailand there is an on-going debate concerning the most desirable form of higher education financing, with the critical concern being the form such a loan scheme should take. Conceptually there are two generic possibilities: a mortgage-type loan, in which repayments are made on a consistent basis over a set time period; and an income contingent loan, in which the level and timing of repayments depend on a borrower’s future income stream. From 1996 to 2006 Thailand’s preferred approach to higher education financing took the form of a mortgage-type loan known as the Student Loan Fund. The SLF involved targeted funds being allocated for both income support and tuition, with a time limited repayment period of 17 years after graduation. In a sister paper for this conference Piruna, Sarachitti and Thitima (2008) (PST) analysed the SLF with respect to two important dimensions: taxpayer financed interest rate subsidies; and measures of so-called “repayment hardships”, calculations of the proportion of borrowers’ future incomes that would need to be allocated to SLF repayments. Very similarly to the findings of Adrian Ziderman and others, PST conclude that the SLF was associated with very substantial subsidies, perhaps of the order of 65 per cent. The source of the subsidy can be traced overwhelmingly to the interest rate regime. Consistent with these high subsidies, and in a unique contribution, they find also that the SLF has low rates of repayment hardships of around 4 per cent on average and only around 10 per cent for graduates whose future earnings are very low. In short, the SLF is a very generous scheme for students. In the current paper we seek to replicate some significant aspects of PST with respect to various suggested forms of income contingent loan schemes for Thailand. By definition this type of loan has “repayment hardships” set as a collection parameter; for example, in the TICAL system explained below and in place in Thailand for 2007 only, the highest rate of repayment was set at 12 per cent of a borrower’s income, and with the current Australian system the figure is 8 per cent. For these schemes repayment hardships are not an issue. However, there can be considerable implicit interest rate subsidies with income contingent loan schemes. The major contribution of this paper lies in the illustration of the extent of these subsidies for four different possible income contingent loan policies for Thailand. We show that the size of the subsidies are of the order of 25 - 40 per cent for a TICAL-type of arrangement calculated for graduates with average earnings, and for this group these subsides can be almost eliminated with alternative loan schemes with a form of a real rate of interest. But a more disaggregated, and preferred, approach to computing loan subsidies reveals that TICAL-type schemes have subsidies of 30-55 per cent, and even improved loan systems with respect to interest rate regimes have the potential to result in subsidies of 3-18 per cent, even for low levels of debt. A major benefit of our approach is that we have used the same data, econometric techniques and present value methods as employed by PST, providing a consistent basis from which to assess alternate loan schemes. We find that in design terms, and with respect to taxpayer subsidies, there seem to be viable possibilities for an income contingent loan scheme for Thailand. But this conclusion is more credible for relatively low levels of debt than for the sizes of tuition that are more likely to be associated with higher price private institutions. In this latter case the subsidies of even well designed schemes can be as high as 50 per cent. Whether or not Thai institutional and administrative arrangements are well suited to the collection of an income contingent loan is a critical policy issue not addressed in what follows.