GLOBAL: Are student loan policies effective?

In the latter part of last century, student loans policies became a central issue in higher education strategies in several countries. On the one hand, the explosion of university enrolments coupled with fiscal pressure, quite naturally pushed towards the participation of graduates in education costs. On the other hand, the debate in higher education policy had been characterised by growing attention to a cost-sharing approach.

According to this theory, the cost of higher education should be shared by four principal parties: government, or taxpayers; parents; students; and/or individual or institutional donors. This means that, although the government recognises the social benefits of higher education (in terms of economic growth, less criminality, more social cohesion, transmission of values), parents and students should also be involved in the funding process, given the high private returns in terms of better status and higher lifetime income.

The strength of the student loans model vis-à-vis other forms of financial support is represented by its ability to guarantee both efficiency and equity. The implementation of student loans models around the world provides a lot of evidence to support this, but the measurement of their impact has usually been based on case studies, often focusing only on some aspects (equity, efficiency etc) of the policy.

There are no theoretical and methodological works able to design comparative evaluations. Our research attempts to plug this gap.

Firstly, we sought to define the minimal requirements that should be met in order to qualify a loan scheme as a public policy. Our postulate is that the main point is the existence of a credit guarantee provided by the state. Student loans become a public programme if, and only if, the guarantee is provided by a third (public) party. In other words there is state intervention aimed at solving a market failure: the inability of the financial system to lend money to a class of potential borrowers because they lack adequate collateral.

Given this preliminary assumption, we attempted to identify the problems that the public policy should solve. They are:

(a) Equity: ensuring access to higher education by students from a disadvantaged background. In many countries the low percentage of poor students is a social problem.
The introduction of a student loans scheme targeted at poor students could increase their educational participation, favouring social mobility.

(b) Finance: increasing higher education funding. The intervention of the state represents an answer to the problem of under-financed public universities. The participation of the student in meeting the cost of his/her education allows for an increase in tuition fees and therefore allows for the maintenance of high standards of teaching. The negative impact of tuition fees on higher education enrolments can be at least partly offset by a loan scheme.

(c) Labour market: promoting specific professional skills. The loan scheme can support the development of specific fields of study, depending on manpower priorities.

(d) Society: securing financial student autonomy. The introduction of a loan programme could grant a mutual independence both to the student and to his/her family because of the absence of economic constraints.

The next step was to construct different models of student loans programmes. A public policy can fail either because of problems in the implementation phase (lack of resources, changes in the environment etc), or because it was badly designed to start with.

Before entering the actual measurement of the policy outcome, therefore, it is necessary to understand if the programme was actually able to meet its goals, that is, if the different elements were combined in an appropriate way.

There is no plausible reason why the fact that the repayments are collected by a public agency or a commercial bank should increase or decrease the effectiveness of the policy, even if it can affect its efficiency.

The main characteristics of student loans programmes are their repayment mechanism, interest rates charged and the total amount of the loan. A fourth and a fifth element can be added: the eligibility rules, and the fact that the programme is designed as an open-ended entitlement or as a fixed amount subsidy programme.

As far as repayment mechanisms are concerned, student loans schemes can be mortgage-type (or conventional) or income-contingent. The first one foresees a repayment scheme in fixed installments for a fixed period of time. The second one is based on repayments as a percentage of a borrower's income.

The second important element is represented by the interest rate, that is, by the existence of an actual subsidy (different from the mere existence of a state guarantee) or by the fact that the normal commercial rate is applied.

The third element is represented by the amount of the loan. Here the two polar alternatives are on the one hand the fact that the loan scheme covers only the tuition fees or, on the other hand, that it includes actual living costs.

The fourth element concerns the eligibility rules. This is a crucial element in the loan design. Here the two polar situations are one in which all prospective students can apply and another in which only people with specific characteristics (family income or academic track record) can become beneficiaries.

The fifth and final element is represented by the nature of the programme: the fact that it is an open-ended entitlement (all the potentially eligible beneficiaries can apply) or that is a fixed amount subsidy (a given amount of resources is available, rationed on the basis of the 'first come, first served' principle or any other criterion).

Taking these factors into account, we looked at four idealised models: namely, increasing equity, promoting students' autonomy, increasing universities' funding and adjusting to the needs of the labour market.

It is possible to assess if the design of a scheme is coherent and able to maximise the expected outcome.

Some of the schemes are more 'generous' than what they should be in theory. If this is a temporary measure in order to 'sell' the programmes to the target groups, then it is understandable and appropriate. But if these features persist over time, then the social efficiency of the policy will be weakened as the state will be investing more than it seems necessary.

Second, this framework can be used to find out the real goals of a loan policy, without the need to make reference to political rhetoric.

Third, the typology proposed allows the development of a system of effectiveness indicators and therefore of a correct evaluation. Once a coherent design has been found in a specific country, by assessing its effectiveness it is possible to ascertain if its failure or partial success is due to the implementation structure or the policy design.

Finally, using our framework can contribute to open the debate about the possibility (and, of course, desirability) of a universal student loan scheme.

For instance, if we embrace the cost-sharing approach, according to which the increase in students' contribution to higher education costs is superior both in efficiency and in equity terms, the loan policy could try to internalise all the possible goals mentioned above.

By granting all students the right to have a loan it could pursue a universal approach; by including in the total amount both the tuition fees (based on the real cost of the study) and living costs it could improve students' autonomy; by providing subsidised interest rates, and introducing an income-contingent repayment mechanism, both conditional upon certain characteristics of the applicant and-or of his or her field of study, it could take into consideration social goals and the need to correct the failures of the labour market.

Of course, this is merely a theoretical exercise, furthermore one based on premises that are far from being widely shared. But it gives an idea, we hope, of the usefulness, also for policy design, of an agreed conceptual framework in order to systematise our knowledge of a given phenomenon, in our case student loan policy.

* Bruno Dente and Nadia Piraino are at the Centre for Administration and Public Policies, Politecnico di Milano in Milan, Italy. This is an edited version of an article, "Models for Determining the Efficiency of Student Loan Policies", in the current edition of the Journal of Higher Education Policy and Management.