Income-Contingent Student Loans for Thailand: Alternatives compared

In Thailand there is an ongoing 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 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 Loans Fund (SLF). The SLF involved targeted funds being allocated for both income support and tuition, with a time-limited repayment period of 17 years after graduation. Piruna et al. (2008) 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, Piruna et al. (2008) conclude that the SLF is 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 hardship of about 4 per cent on average and only about 10 per cent for graduates whose future earnings are very low. In short, the SLF is a very generous scheme for students. In this chapter, we seek to replicate some significant aspects of Piruna et al. (2008) with respect to various suggested forms of income-contingent loan schemes for Thailand. By definition, this type of loan has ‘repayment hardship’ set as a collection parameter—for example, in the Thai Income Contingent Allowance and Loan (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. There can be, however, considerable implicit interest rate subsidies with incomecontingent loan schemes. The major contribution of this chapter lies in the illustration of the extent of these subsidies for four different possible incomecontingent loan policies for Thailand. We show that the size of the subsidies is of the order of 25–40 per cent for a TICAL-type 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 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 Piruna et al. (2008), providing a consistent basis from which to assess alternative 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 fees 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.