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

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?

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  1. 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

  2. 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

  3. 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

  4. 3 Bank Loans with a Government Guarantee • Solves the bank risk problem • Provides finance easily • But: student risk remains • And: repayment hardship exists

  5. Bank Loans and Student Default Risk

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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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