1. Bruce Chapman Australian National University
Understanding Mortgage-type (Bank) Student Loans: Econometric Illustrations of Repayment Burdens
Bruce Chapman
Australian National University

2. Overview
The need for government intervention in student loans: capital market failure, uncertainty and collateral
Mortgage versus ICL
Understanding the role of repayment burdens: consumption hardship and default
Illustrating the problems: the method explained
The importance of earnings disaggregation: egs from Indonesia, Vietnam, Thailand and the US
ICL solution and collection issues

3. Costs and benefits of “normal” (gov’t guaranteed) student loans
What is a “normal” bank loan?
Benefit: provide finance easily
Benefit: provide insurance for the lender
Cost: rationing because of costs
Cost: repayment hardship
Cost: no insurance against default
Collection difficulties: hard to enforce

4. Costs and benefits of ICL
What is an ICL?
Benefit: default insurance
Benefit: repayment hardship insurance
Cost: possible moral hazard
Cost: possible adverse selection
Collection difficulty: need to know graduates’ incomes over their lifetimes

5. A critical issue for economic analysis of loan systems: Interest rate subsidies (not to be covered in detail)
Repayment conditions of the loan determine if there is an interest rate subsidy
With subsidies the PV of total repayment is less than the original debt.
Subsidy

6. Origins, and examples, of interest rate subsidies
No nominal interest rates during study period
Grace periods following study with no nominal interest rates
Zero or negative real rates of interest for the duration of the repayment period
Unpaid debt
Eg of IRS: Germany about 80%; former UK ICL scheme of about 35%, now about 55%; Australian ICL of about 25%; Thailand SLF of about 70%.

7. Understanding and illustrating repayment burdens for bank loans
Higher repayment burdens come from:
Higher interest rates
Higher loan sizes
Shorter repayment periods
Lower graduate incomes

8. Repayment Burden Method Explained
Calculating RBs is the goal
The use of a hypothetical graduate experience (enroll age 18, graduate age 22)
Illustrating calculations of the numerator: hypothetical or actual loan repayment obligations
Estimates of the denominator on average by age and sex
Illustrating the power of income distribution disaggregation: unconditional quantile analysis
Indonesia as an example
Vietnam and Thailand applications
A case study of Stafford Loans RBs for the US

9. A hypothetical Indonesian student loan scheme explained

10. Q25-Q50 Age-income profiles by island and sex: Indonesia

11. Q25-Q50 Indonesia annual RBs by island and sex

12. Hypothetical Vietnamese student loan scheme

13. Q25-Q50 Age-income profiles by urban rich-rural poor and sex: Vietnam

14. Q25-Q50 Annual repayment burdens by urban rich-rural poor and sex: Vietnam

15. Thai student loan scheme

16. Q25-Q50 Age-income profiles by sex: Thailand

17. Q25-Q50 Annual repayment burdens by sex: Thailand

18. A Detailed Case Study: Stafford Loan RBs in the US (lawyers and teachers)
Loan repayments illustrated
Age-income profiles on average
Occupational RB results

19. INFLATION ADJUSTED STAFFORD LOAN REPAYMENT STREAMS

20. STAFFORD LOAN REPAYMENT CONDITIONS*

21. INCOME DESCRIPTIVE STATISTICS

22. MALE OLS AGE-INCOME PROFILES.

23. FEMALE OLS AGE-INCOME PROFILES.

24. MALE AVERAGE GRADUATE UNCONDITIONAL QUANTILE AGE-INCOME PROFILES

25. FEMALE AVERAGE GRADUATE UNCONDITIONAL QUANTILE AGE-INCOME PROFILES

26. AVERAGE AND MEDIAN REPAYMENT BURDENSa

27. REPAYMENT BURDENS BY QUANTILEa

28. MALE GRADUATES REPAYMENT BURDENS

29. FEMALE GRADUATES REPAYMENT BURDENS

30. REPAYMENT BURDENS BY QUANTILE
a Debt level is $20,000 for typical graduates and teachers; $100,000 for lawyers.
b Refers to the highest repayment burdens in any one year after graduation.
c We only report the average repayment burdens for the first 10 years of the extended repayment plan.
* Repayment burden exceeds 15 per cent.
** Repayment burden exceeds 18 per cent.

31. PROBABILITIES OF EXPERIENCING HIGH (>18%) REPAYMENT BURDENS

32. REPAYMENT BURDENS OF LOW INCOME LAWYERS WITH MAXIMUM DEBT

33. Discussion Govts must be involved in higher education financing
Interest rate subsidies matter in an understanding of what a loan really means
The right way to consider RBs is with disaggregated income distributions
“Normal” loans can have high repayment burdens (and thus defaults) in many different countries
High RBs will mean consumption hardship, defaults and issues of occupational choice
ICL solves repayment burden problem
But, collection, collection, collection

34. Thank you

36. FIGURE 2. PROBABILITY DISTRIBUTIONS OF MALE AND FEMALE GRADUATE INCOMES (AGE 22-25) Panel A: Male

37. FIGURE 2. PROBABILITY DISTRIBUTIONS OF MALE AND FEMALE GRADUATE INCOMES (AGE 22-25) Panel B: Female

38. An example of RBs: the US Stafford Loans System
Extreme example: US law graduates with maximum debt of $138,500
RBs calculated for bottom 25% of incomes for female private sector lawyers is 23%
RBs calculated for bottom 25% of incomes female public sector lawyers is 47%

39. The trade-off between RB and IS for “normal” loan schemes
Problem for government: High implicit interest rate subsidies are costly
Problem for student: High repayment burdens make life difficult.
The high implicit subsidies problem can be reduced by charging higher interest rates.
BUT higher interest rates leads to RBs and default (hence higher total implicit subsidies).

40. The trade-off between RB and IS for “normal” loan schemes
Problem for government: High implicit interest rate subsidies are costly
Problem for student: High repayment burdens make life difficult.
The high implicit subsidies problem can be reduced by charging higher interest rates.
BUT higher interest rates leads to RBs and default (hence higher total implicit subsidies).

41. Q25-Q50 Age-income profiles by island and sex: Indonesia