PTPTN Education Loans in Malaysia and HECS in Australia

The issue of education loans for university entry in Malaysia was an election issue with the opposition arguing for free education and the government maintaining that their loan scheme is more responsible, owing to the fact that they need to avoid increasing the budget deficit (well they did not say that but that is understood) and that the current system allows those who could not otherwise pay for tertiary education can still access universities via the loan scheme.

Now we have the issue of high number of loan defaults and this seems to have raised contrary views on social media, with some sympathetic to the defaulters and others insisting they should pay up. So where do I see the issue?

First, it is important to discuss the Economic term 'externality'. What this essentially means is that a certain action or activity undertaken for private benefits will result in a 'spillover' to society. Negative externalities are well understood by society. For example, we argue that that the production of coal results in a negative externality. The producer is only considering his or her private benefit and private costs of producing coal. The benefit is the price received and the cost is the, well, the cost incurred in producing the coal. For the private producer the cost includes aspects like cost of labour, rent, extraction costs, transportation and various govt taxes and levies. It DOES NOT include the cost to society in the form of pollution. In this case social marginal cost exceeds private marginal cost, but since cost decisions made by the producer reflect the latter, too much coal will be produced. This is the thinking behind a carbon tax-to better reflect the true cost of producing carbon products. With negative externalities we produce too much from a societal point of view.

Positive externalities are far less understood. This is where we produce too little of the product from a societal point of view because the producer is only considering the private benefit and the value of the private benefit is less than the societal benefit. A simple example I give my students is a neighbourhood where a particularly keen amateur gardener does wonders to his or her front lawn. It looks beautiful, raises the value of homes around it and gives pleasure to the neighbours when they stroll around with their kids in the evenings. But the gardener is only doing it for him/herself, not for 'society'. Consequently he or she is producing too little 'garden beauty' and should do even more, but he or she is merely doing enough given his or her private benefit and private cost. In order to encourage more gardening the neighbours (as society) should provide incentives to the gardener-buy their tools and fertiliser for example. in other words, subsidise the cost so 'output' will increase such that the outcome will closer mirror societal benefit.

Thus it is with education. Governments everywhere encourage education precisely because they understand that education producer positive externalities-they spillover into society in a good way. Greater levels of education produces more stable societies that value longer-term outcomes and encourages civil society. The education received rubs off on those close to the educated as they pass on their knowledge to others. but the decision to enter into education is based on private costs and private benefits, and ignores societal benefits. I mean who on earth decides to go to university because it will make 'the country better?' Pretty much no one-we do so because it'll make us better off, or at least we think it will. Hence, on private decisions, society will under-invest in education. In order to make education more attractive (either by encouraging more people to study or to encourage current students to study more) we can lower their private cost by subsidising education. This is partially why education is subsidised.

Second, we need to understand the uncertainty of future income streams arising out of investment decisions made at present. Entering university for 3-4 years is an investment decision. We forego current income by not working now, plus we pay fees to study in the hope that our return on investment in the form of better future jobs and salaries will offset the costs incurred. The costs can be substantial for tertiary education, even after the subsidy. And like small business owners or entrepeneurs, credit is difficult to come by, and if they do manage to access credit, face punitive interest rates from the free market that reflect the uncertainty of future investment returns and lack of collatoral. This then makes the potential investment even more unattractive.

Hence government sponsored education loans. They are two types of these: loans that must be repaid at an interest rate lower than the market rate (i.e. PTPTN), or income-contingent loans (i.e. HECS - Higher Education Contribution Scheme. This is indexed to inflation only in Australia; hence no interest rate applies). Both are also schemes that make it more likely that those from poorer backgrounds manage to enter tertiary education by reducing the cost of education in terms of the value of repayments. In this case they are lowering private costs and hence 'subsidising' the private costs and better reflect positive externalities.

However, the former demands repayment whether or not the investment decision worked out or not. Hence, someone who fails to get a job has to re-pay. The latter, on the other hand, better captures uncertain outcomes on future returns to current investments, by making re-payment contingent on a positive return to investment. You re-pay if you actually end up earning more than a certain amount of money only. For example, if you earn less than a threshold income, you simply pay the normal tax rate. If you earn more, you start paying the normal tax rate + a certain percentage reflecting how much more you earn. And this can be quite punitive. Someone doing very well faces a top tax threshold of 46.5%, 1.5% medicare levy and a HECS repayment of 8% for example. If the education investment really worked out extremely well for you, we'll ensure you pay it back very quickly. If the investment was a poor decision, we (the government which represents society, that provided the loan) will kop it sweet.

This ensures that the true costs and benefits of higher education are shared by the individual investor and society as pooled financial investors. This also breeds greater certainty and encourages investment in education at the margins, though perhaps it may just increase investments into education too much such that those not best suited to do so decide to enter into education. If so, this will lead to higher than expected poor returns insofar as these individuals do not earn past the threshold.

How has this worked out? Non-repayment rates can be fairly high, thus meaning that the government burden is high but with the PTPTN is that not also the case? Nevertheless, there is no default; the student is not being chased to repay even if they cannot afford to repay. The 'loan' simply remains to be repaid until such time it can be repaid, if ever (no idea if it is taken from the estate of the deceased loanee though). This works out better for women and those from poorer backgrounds. For the former, this is obvious with time out for childrearing. There is no pressure to pay when earning $0 while taking care of the future generation. I read somewhere a number of years ago that up to 25% of females will never fully repay the HECS loan-this reflects childrearing (though the Australian labour market is highly gender segregated and female dominated jobs tend to pay far less than male dominated work). Also, this encourages those from poor or disadvantaged backgrounds to enter into tertiary study because the cost of failure to earn a return on the investment is lower than under the PTPTN. Also, it does not involve families. The PTPTN nominally excludes family financing but in reality families need get involved to repay the loan if the student is unable to do so. This is a potential consideration for students, or should be at least (though do teenagers think of this?).

Finally, I would argue that the HECS is also fairer insofar as we are asking teenagers to decide on future investments. They can't even decide which nightclub to visit, much less which university, which course and which occupation to go for. They are too idealistic and wish to study what they like, irrespective of what the outcome is. This I know-year in, year out I talk to teenagers who want to study music and the like. I can tell them about how all of my friends who studied music ended up working at the front counter of fast-food restaurants but they do not care. We give out education loans to teenagers who are not really capable of making a proper cost-benefit analysis of their education decision. This is highly irresponsible behaviour, especially when we do not give them proper information on future labour demand and remuneration information. And can we anyway? Demand for lawyers today, for example, could be very different in 5 years time.

Overall, HECS is a system Malaysia should consider. It captures both positive externality AND uncertain investment outcomes. It makes it easier for women and those from poorer and disadvantaged backgrounds to undertake the decision to enter into tertiary education, and better reflect the shared burden between the individual and society. In theory it will cost more than PTPTN since there is no actual need for full repayment but I have no idea what the PTPTN default rate is, so perhaps not. It also ensures families will not have to help a defaulter repay.

I am incredibly surprised that this scheme was not implemented in Malaysia. Variants of HECS have been implemented in 24 countries including Thailand. It has recently been implemented in England and Wales as well, one of the biggest tertiary education markets in the world. It s certainly something that needs to be considered. Given the unlikely option of free education, surely this is something some politician in Malaysia can bring up?

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