Student Loans in an International Context

Student loans are increasingly used to provide financial assistance for students in higher education, in both industrialized and developing countries. The need for financial assistance to enable students from low-income families to meet direct and indirect costs of education (tuition fees, books, and living expenses) is widely recognized, and the case for student support programs to ensure equality of opportunity, equity, and social justice is rarely questioned. What is a matter of dispute however, is whether financial support should be provided by governments, private agencies, employers, or institutions, and whether it should be in the form of scholarships, bursaries, grants–either available to all students or means-tested (i.e., targeted by financial need)–or repayable loans. Fierce controversy has surrounded the idea of student loan programs since their inception.

National student loan programs were first established in the 1950s in countries as diverse as Colombia, Denmark, Norway, Sweden, Japan, and the United States. The following decades saw a steady expansion of student loan programs, through the introduction of student loans in new countries and expansion in the number of loans available and their average size. In response to higher education expansion, combined with increasing financial stringency and concern for equity, there was a surge of interest in student loans in the late 1980s and 1990s, with new programs introduced in Australia, New Zealand, and the United Kingdom; several countries in eastern Europe and the former Soviet Union, including Hungary and Russia, considering introducing student loans for the first time; and some developing countries in Asia, Africa, and Latin America establishing or expanding student loan programs. Yet student loans remain controversial, and advantages and disadvantages of loans continue to be widely debated. Debate also surrounds the question of how student loans should be administered: in particular, eligibility and terms of repayment of loans, appropriate rates of interest, and mechanisms to target disadvantaged students while minimizing default. This entry summarizes the recent growth of student loan programs, reviews the literature analyzing the international experience of student loans, both in developed and developing countries, and examines some implications of the growth of student loans for student and labor mobility.

Development of Student Loan Programs

Early examples of national student loan programs included the National Defense Student Loan (NDSL) program, introduced in the United States in 1958; state loan funds for students established in Denmark, Norway, and Sweden in the early 1950s; and a small-scale program introduced in Colombia in 1953, the Instituto Colombiano de Credito Educativo y Estudios Tecnicos en el Exterior (ICETEX). During the 1960s and 1970s student loan programs were set up in many countries, including Canada (the Canada Student Loan Program began in 1964), several Latin American countries (by 1980 student loan programs existed in at least fifteen countries in Latin America and the Caribbean), and a few developing countries in Africa and Asia (including Ghana and India). But many programs were either small-scale, as in many Latin American countries, or short-lived–the loan program in Ghana lasted only a few years.

During the 1980s there was continued growth in student loan programs and many countries, including Japan, Scandinavian countries, and the United States, began to rely increasingly on loans as a means of student support. Many countries, particularly in Europe, still offer student support through a combination of grants and loans, but there has been a marked shift towards greater use of loans. In the United States, the College Board noted in 1999 that "Over the past quarter century, federal student aid has drifted from a grant-based to a loan-based system, producing a sea change in the way many students and families finance post-secondary education" (p. 4). In the United Kingdom the first student loan program was set up in 1989 to provide "top-up" loans to supplement maintenance grants for students' living expenses. However, since the introduction of tuition fees in 1998, loans have been the main form of student support, with the abolition of grants for all but a minority of financially needy students in England and Wales; a different scheme has operated in Scotland since 2000. In Australia, the Higher Education Contribution Scheme (HECS) was introduced in 1989, with students able to opt for deferred payment through income-contingent loans with payments collected by the tax authorities, and support for living expenses in Australia is now also in the form of income-contingent loans.

There has also been renewed interest in student loans in developing countries, partly due to growing recognition of the need to increase cost recovery in secondary and higher education. The World Bank's 1994 policy paper on higher education recommended: "Cost-sharing coupled with student financial assistance is an efficient strategy for achieving expanded coverage and better quality in higher education … while protecting equity of access…. Given that in every developing country students attending higher education represent an elite group, with income-earning potential significantly higher than that of their peers, it is appropriate that the major form of student financial assistance offered be government-guaranteed student loans rather than grants" (p. 50). In the 1990s new student loan programs were set up in several African countries, including Kenya, Nigeria, and South Africa, and in the Asian countries of China, Malaysia, Thailand, and Vietnam.

Characteristics of Student Loans

The basic characteristic of all student loan schemes is that students are offered the chance to borrow money to help them finance tuition costs or living expenses. After completing their studies, graduates must repay the amount borrowed, with or without interest. Although all loan schemes share this basic characteristic, there are important differences in the way different programs are administered, particularly in terms of (1) whether loan programs are operated by the government, independent agencies, banks, or higher education institutions; (2) the level of interest charged, and whether this is subsidized (i.e., lower than commercial or market interest rates); and (3) the way in which repayments are collected–in particular whether loan repayments are fixed over a specific time period (often described as mortgage-type loans), or whether graduates must repay a fixed proportion of their income each year until the loan is repaid (usually described as income-contingent loans).

Evaluation of International Experience

Increased popularity of student loans since the 1960s has stimulated research on both theoretical and empirical issues. As wide variations exist between programs, comparative studies of international experience–which highlight significant differences, examine economic or social effects of alternative systems, and identify strengths and weaknesses–can be particularly valuable. A 1986 comparative study of student support in the United States and four European countries (France, Germany, Sweden, and the United Kingdom) by Bruce Johnstone argued that "it was a major premise of this study, borne out by the research, that these and other countries must balance very similar public policy goals in apportioning the costs [of higher education] … and that each country can benefit … by understanding what countries with similar higher educational systems and public policy objectives are doing" (p. 1).

Since this and a few other comparative studies were published in the 1980s there has been growing interest in learning from international experience. Reforms of student aid policies and systems taking place between 1989 and 1999 in Australia, Sweden, and the United Kingdom drew upon lessons from experience in other countries. In Sweden, the government changed the national system in 1989 by reducing the level of interest subsidy offered on student loans, but introducing income-contingent repayment, linking the amount of graduates' loan repayments with their level of income. This reflected Johnstone's comparative analysis of student loan schemes that showed that under the previous scheme Swedish students enjoyed far higher "implicit grants" because of the interest subsidy than American students. A major policy shift also occurred in the United Kingdom with the introduction of student loans in 1989, and the British government drew heavily on international experience in justifying loans as a means of student support. More recently the experience of Australia and Sweden in introducing and implementing income-contingent loans has been widely quoted as offering important lessons for the design of student loan schemes. Nicholas Barr described income-contingent student loans as "an idea whose time has come" (1991, p. 155), and praised Australia for having introduced a "highly effective income-contingent loan scheme" (1998, p. 186).

Other reviews of international experience have focused on developing countries, where the effectiveness of student loans has often proved disappointing. In the early 1990s a series of international forums on student loans organized by the International Institute for Educational Planning (IIEP) analyzed experiences in the United States, Europe, and in developing countries. An evaluation of student loan experience in developing countries was summarized with the conclusion that "student loans can make a contribution to relieving the financial pressures facing higher education, provided that loan programmes are properly designed, effectively managed and a high rate of recovery is achieved" (Wood-hall 1992, p. 355). Requirements for success include:

• sound financial management, including appropriate interest rates to maintain the capital value of the loan fund and cover administrative costs;
• a sound legal framework to ensure that loan recovery is legally enforceable;
• effective machinery for targeting financial support and selecting recipients of subsidies on grounds of financial need or manpower priorities;
• effective machinery for loan recovery, to minimize default;
• publicity campaigns to ensure widespread understanding and acceptance of the principles of student loans and the importance of the obligation to repay.

These broad conclusions on feasibility and scope for use of student loans in developing countries were echoed in a 1995 comparative study for the World Bank by Adrian Ziderman and Douglas Albrecht, who concluded that: "student loans have received much attention both in the literature and in practice. While they have not always worked well … suitably reformed, they can constitute a productive, though limited mechanism for cost recovery" (p. 371).

International Issues

The first student loan schemes were mainly concerned with enhancing higher education participation in a domestic context, but implications for international student mobility were quickly recognized. An important feature of student loan schemes is that they provide financial assistance and subsidies to individual students, rather than to institutions. In principle, loans should be portable from one institution to another, and even across national boundaries. The first student loan program in Latin America, ICETEX in Colombia, was initially set up to provide financial assistance for students intending to study abroad. This remains one of the main purposes of ICETEX, although growing cost differentials between higher education in Colombia and in the United States or other developed countries mean that it now provides loans for many more students who study in Colombia than for students studying abroad. Some other national schemes offer loans for study abroad as well as for those studying in national higher education institutions, but a number of issues limit the use of student loans to finance study abroad. These include the cost differentials already mentioned, and the difficulties of enforcing loan repayments if graduates choose to work abroad after completing their studies.

Programs designed to increase student mobility, such as the Erasmus and Tempus programs set up to promote student exchange and mobility in the European Union (EU), are mainly concerned with facilitating student mobility between member countries (for example by harmonizing entry requirements for study programs in different countries and establishing credit transfer arrangements) rather than with setting up a system of financial support transportable across national boundaries. Students' own governments are generally expected to finance the costs of study abroad–whether by grants, student loans, or other means–but the need for greater harmonization of rules determining levels of tuition fees and student support in different countries is increasingly emphasized, as student mobility and opportunities for study abroad increase.

Another important issue now recognized in several countries, as skilled labor becomes increasingly mobile, is the need to design mechanisms for collecting loan repayments from graduates working abroad. Implications for student loans of what is variously described as international labor mobility or "brain drain" have received limited attention, although potential losses from graduates who choose to work abroad and then default on loan repayments have been emphasized by critics of student loans. Barr argues that income-contingent loans could be collected by the tax authorities in any country where a graduate subsequently works, and the revenue transferred to the country that originally provided a student loan: "With such an arrangement loan repayments are transparent with respect to international boundaries" (2001, p. 234). Barr further proposes that that "it would be possible for the EU or the World Bank to establish an International Learning Bank from which students in poor countries would borrow to finance their tertiary education–both those who subsequently stay at home and those who emigrate" (2001, p. 234). Such possibilities, and their implications for the finance of higher education and for labor mobility, remain to be explored.