STUDENT FINANCING: THE BRAZILIAN CASE (with some insights from and - - PowerPoint PPT Presentation
Developed by Paulo A. Meyer M. Nascimento HIGHER EDUCATION This material can be used so long as the author is cited STUDENT FINANCING: THE BRAZILIAN CASE (with some insights from and on the US) PAULO A. MEYER M. NASCIMENTO Spring 2017
(with some insights from and on the US)
PAULO A. MEYER M. NASCIMENTO
Spring 2017
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senator
E SAND NDERS
Source: http://www.cnn.com/2016/02/03/politics/bernie-sanders-free-college-costs/
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Diffuse consensus … … confusing dissent:
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colleges and universities, splitting the bill between federal government (2/3) and state governments (1/3).
rates and enabling borrowers to refinance their loans.
eliminating the requirement that students re-apply for financial aid each year.
finance these reforms.
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“Schooling after the second grade plays
gaps”
MILTON TON FRIED EDMA MAN Nobel el laureate eate in Econo
mics JAMES MES HECKMA KMAN Nobel el laureate eate in Econo
mics
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40 60 80 100 120 140 160 180 200 220 240 260 280 300
Below upper secondary All tertiary short-cycle tertiary Bachelor's or equivalent Master's, doctoral or equivalent
Index
Master's, doctoral or equivalent: Brazil 434 Chile 444, Mexico 307
Relative earnings of adults working full-time, by educational attainment (2014).
25-64 year-olds with income from employment; upper secondary education (high school) = 100
Source: OECD (2016), Education at a glance.
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Students Initial College Attendance Continued College Attendance (repeated) College Outcomes (degree, job) Family and Individual Background Financial Aid & Loans Institutions and Gov’t
If tuition fees exist, the yellow balloon in the chart bellow becomes a central policy issue
(especially if the diffuse consensus expressed in Sanders’ discourse is indeed a society goal)
Chart extracted (with minor adaptations) from Eric Bettinger’s keynote speech at ABAVE 2015 Meeting in Brazil.
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GABR ABRIEL IEL BETA TANCOUR COURT MEJÍA ÍA Colombi mbian an economist mist, , diplo lomat mat and politic tician ian
“El crédito educativo se fundamenta en un principio: se le presta al estudiante para que pague el profesional”
Student loans are not a new concept: private student credit agencies exist in the US since the 19th century, with Harvard University being the pioneer in creating its own in 1838 (Fuller, 2014). However, institutionalizing educational credit as a public policy was an idea first developed by Gabriel Betancourt Mejía, who wrote a thesis in 1943 as a result
(Woodhall, 1983; Betancourt-Mejía, 1992). The Colombian educational credit agency, established in 1950, was the first of a public nature. Henceforth, government-run student loan programs have been adopted by an increasing number of countries (Nascimento, 2016). Developed by Paulo A. Meyer M. Nascimento This material can be used so long as the author is cited
Chart extracted from Dynarski (2016).
this problem?
system work out?
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Who defaults in student loans in the US? Could free community colleges solve this problem? Could a more flexible student loan system work out?
Bringing prices at community colleges back to their historic standard – near zero – would be one way to reduce borrowing and, thereby, debt distress, but this would not end the debt problems of those who attend for-profit institutions (Dynarski, 2016). Yes! Lengthening the horizon of loan repayment, linking payments to current income, and collecting instalments through the same mechanisms by which the Government collects income taxes and social security contributions. Increase in default is mostly associated with the rise in the number of borrowers at for- profit schools and, to a lesser extent, 2-year institutions (mainly community colleges) and certain other non- selective institutions (Looney and Yannelis, 2015).
34% of those borrowing under $5,000; only 18% of those borrowing more than $100,000.
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Time-based repayment loans (TBRL) can turn out to be very difficult to be managed by graduates!
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Repayment burdens (RBs) may become too high for some graduates, e.g. low-earner females:
Brazil: RBs by age for females with a FIES loan of $14,000 US: RBs by age for females with a Stafford Loan of $20,000
0% 10% 20% 30% 40% 50% 60% 24 25 26 27 28 29 30 31 32 33 34 35 REPAYMENT BURDENS (RB), PROPORTION OF INCOME AGE Source: Nascimento (unpublished).
AGE RB for the 10th percentile RB for the 20th percentile RB for the 50th percentile
0% 20% 40% 60% 80% 100% 120% 140% 22 23 24 25 26 27 28 29 30 31 REPAYMENT BURDEN (RB), PROPORTION OF INCOME AGE Source: Chapman & Dearden (2017).
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MILTO TON N FRIEDMA EDMAN Nobel el laureate eate in Econo
mics
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JAMES MES TOBI BIN Nobel el laureate eate in Econo
mics
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Proponents such as Chapman and Barr are seeking to secure an appropriate level of instructional costsharing between families and taxpayers and also to make the share borne by students manageable and not to distort the decision to attend and persist in an appropriate institution and program. At the same time, some proponents—such as Milton Friedman, the father of the concept—are as or more interested in eliminating altogether— or at least minimizing—the taxpayer subsidization of higher education. And in a similar vein, in countries with large and important private higher educational sectors, such as the United States, [some] may see income contingent loans mainly as a means to greatly raise public sector tuition fees and thereby to lessen the tuition price disparities that they view as unfair competition. (Johnstone, 2016)
BRUCE CE JOHNSTON STONE University rsity at at Buffalo
It is now clear that income contingent arrangements can be designed to be administratively feasible, even straightforward. As well, the revenue potential for higher education is considerable. Perhaps most importantly, the Australian experience with HECS reveals strongly that even a radical movement away from a no- charge system can be instituted without jeopardising the participation of disadvantaged potential students; this is all traceable to income contingent repayment. (Chapman, 1997) In the absence of any subsidy, an individual's investment in a degree would confer a 'dividend' on future taxpayers. [This] gives an efficiency case for some subsidy, [but] the greater the public- sector subsidy to higher education the greater the pressure on the system not to grow. The introduction of private funds is central to the expansion of student number. [ICLs] offer the borrower insurance against potential future poverty, a feature of greater relevance the higher the applicant's degree of risk aversion. (Barr, 1993)
BRUCE CE CHAPMAN Austr tralian Nation tional Universit rsity NICH CHOL OLAS S BARR London
cs
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JOSEP EPH H STIGL GLITZ TZ Nobel el laureate eate in Econo
mics
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Bills to introduce a broadly-based ICL for higher education have been proposed in 2012, 2013, 2015 and 2017 in the US Congress (the Earnings Contingent Education Loans – ExCEL Acts). None of them has ever passed.
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There are four income-driven repayment
in the US; None of them are the default repayment plan – the automatic option is a 10-year mortgage-style fixed payment; All of them are based on past income; Borrowers opting out for one of the income- driven repayment plans have to reapply every year, going through complicated financial paperwork year by year and again if their income change; Process matters: those who most need a helping hand are probably the least able to navigate this bureaucracy.
Revised Pay As You Earn Repayment Plan (REPAYE Plan) Pay As You Earn Repayment Plan (PAYE Plan) Income-Based Repayment Plan (IBR Plan) Income-Contingent Repayment Plan (ICR Plan)
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REPAYMENT PLAN AVAILABLE? ELIGIBILITY MONTHLY PAYMENT DISCHARGE AFTER
Revised Pay As You Earn (REPAYE) Now (since December 17, 2015) All Direct student loan borrowers. No partial financial hardship (PFH) requirement 10% of discretionary income 20 years if repaying only undergraduate debt; 25 years if repaying any graduate debt Income-Based Repayment (2014 IBR) Now (since July 1, 2014) Borrowers who take out their first loan
10% of discretionary income, up to the fixed 10-year payment amount 20 years Pay As You Earn (PAYE) Now (since 2012) Direct student loan borrowers who took
2007 and at least one loan after September 30, 2011, and have a PFH 10% of discretionary income, up to the fixed 10-year payment amount 20 years Income-Based Repayment (Original IBR) Now (since 2009) All federal student loan borrowers (Direct Loan or Federal Family Education Loan – FFEL) with a PFH 15% of discretionary income, up to the fixed 10-year payment amount 25 years Income- Contingent Repayment (ICR) Now (since 1994) All Direct Loan borrowers. No PFH requirement The lesser of: 20% of discretionary income or 12- year repayment amount x income percentage factor 25 years
Extracted from: http://www.ibrinfo.org/what.vp.html
SUMMARY OF THE CURRENT INCOME-DRIVEN REPAYMENT PLANS IN THE US
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During his campaign, President Trump said he would change the terms of the income-driven repayment plans so that payments would be capped at 12.5% of discretionary income and any remaining debt would be forgiven after 15 years.
http://money.cnn.com/2017/04/21/pf/college/trump-student-loans-betsy- devos/
During the Republican party presidential primaries, Bush proposed to replace student loans with a $50,000 line of credit that is repaid solely based on
years for each $10,000 that they access to pay for their college educations. No interest would be charged and total payments would be capped at 1.75 times the original amount borrowed.
https://www.brookings.edu/research/jeb-bushs-student-loan-plan-should-outlive-his-campaign/
Clinton’s platform incorporated many
make it easier for borrowers to enroll in income-driven repayment plans that would cap monthly payments at 10% of discretionary income.
https://www.hillaryclinton.com/briefing/factsheets/2016/07/06/hillary
Senator Sanders’ policy proposals for student loans are condensed in his College for All Act, discussed earlier in this presentation.
DONALD LD TRUMP Presi sident dent of
ted d States tes JEB BUSH Former er Gov
erno nor of
HIL ILLA LARY RY CLIN INTO TON Former er US Senat ator
BERNI NIE E SANDER DERS US Senat ator
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Characteristics of a good loan design (i)
Income-contingent repayments based on current earnings. A write-off after n years, or at retirement or death. Repayment threshold and repayment rate chosen so that: A graduate with ‘good’ earnings repays (in present value terms) 100 per cent, or for high earners perhaps more than 100 per cent, in the latter case with a cap on maximum overpayment (in present value terms) by any individual, to avoid the “Mick Jagger problem”. As far as possible seeks to avoid distortions, e.g. large cliff edges
Implicit subsidy should be concentrated on people with low lifetime earnings. Loss
borrowers should be minimal (therefore, interest-rate subsidies should be particularly avoided, as they benefit everyone, including the wealthiest).
Source: Barr, Chapman, Dearden & Dynarski (2017).
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Characteristics of a good loan design (ii)
Fiscal parsimony of loan design matters, not out of a sense of the purity of the loan, but because loans that make avoidable losses reduce their capacity to fulfil their core purpose of facilitating investment in human capital. Expensive loans restrict one or more of: The number of loans that are made available; The size of loans; Student numbers; The breadth of the loan system, e.g. not covering living costs,
students in sub-degree tertiary education; Spending on more powerful pro-access policies, including earlier in the system.
Source: Barr, Chapman, Dearden & Dynarski (2017).
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Financing non-repayment. The design question is where the loss on low- earning borrowers should fall: (a) on the taxpayer, implying ex post subsidies at potentially large fiscal costs, creating downward pressure on the number and/or size of loans and crowding out other beneficial activities; (b) on the cohort of borrowers through:
government’s cost of borrowing) or
With a small loan any of these methods can work. The larger the loan the greater the marginal loss. If loans are large, excessive reliance on any one method is generally suboptimal, because large losses require substantial ex-post subsidies, risk premia or surcharges. Substantial risk premia or surcharges raise the prospect of adverse selection and may create political problems.
Source: Barr, Chapman, Dearden & Dynarski (2017).
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There are 205.8 million citizens living in this middle-income commodity- producer mostly Christian and urban country situated in South America. Brazil is still a young nation, but current favorable age structure will begin to shift around 2025. Inequality is high, but public pensions reduce poverty among the elderly, and in the last 20 years Bolsa Familia and other social programs have lifted tens of millions out of poverty. Only 14% of 25-64 years-old hold tertiary degrees, whereas the OECD average is 35%.
Let’s talk about Brazil!
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0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 0.00 2,000.00 4,000.00 6,000.00 8,000.00 10,000.00 12,000.00 14,000.00 16,000.00 18,000.00
K-12 education Higher education Brazil / OECD (in %) public expenditure per student (in USD PPP) OECD average Brazil Brazil / OECD average
Public expenditures per student in K-12 x Higher education, Brazil x OECD
Source: OECD. Chart adapted from Nascimento and Verhine (2017).
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Approved by law, the 2014-2024 National Plan for Education (NPE) sets three targets for higher education:
Indicator The target for 2024 How it was in 2014 Enrolments as a proportion of the 18-24 years-old population 50% 34.2% Proportion of 18-24 years-old Brazilians enrolled in higher education 33% 17.7% New enrolments in public institutions as a proportion of total new enrolments 40% 5.5%
million people were enrolled in undergraduate programs in Brazil in 2015
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completed secondary schooling.
education: PISA results for Brazil improved substantially in the first editions, but high proportions of students still perform poorly in all three assessed subjects – and improvements in recent editions are marginal.
the Brazilian Congress limits the growth of public spending to the rate of inflation for the next 20 years.
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Using a sample of over 3000 first year university entrants in Greece, Psacharopoulos & Papakonstantinou (2005) find that families spend privately more than the state in order to prepare for the entrance examinations and while studying at the university. In addition, poorer families spend a higher share of their income
children.
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Brazil to the introduction of tuition fees in public higher education institutions (public HEI).
institutions is guaranteed by the Brazilian Constitution.
advocating so.
proposed in the Brazilian Congress to put this “gratuity” in relative terms.
priorities and lacks popularity to approve a wider agenda.
comes to higher education funding policies in Brazil.
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A federal student loan program designed to defer fees for low-income students enrolled in undergraduate programs run by private higher education institutions (private HEI). It exists since 1999, but it was much less important until reforms undertaken in 2010, which reduced interest rates, extended eligibility to students from middle income families and substantially raised the program’s budget (11.4 times in real terms between 2010 and 2014). In 2014, Fies new contracts were as many as the equivalent to 44% of new enrolments in private HEI (Corbucci, Kubota and Meira, 2016). 1.5 year later, FIES’ budget started to be cut, interest rates were raised and eligibility was restricted to low-income students with a minimal performance in the National High School Exam (ENEM). Government is discussing alternatives for a complete redesign of FIES.
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100 200 300 400 500 600 700 800 900 1000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 PROUNI (new scholarships) FIES (new loans) new entrants in private HEI
Source: FNDE and INEP. Chart extracted from Nascimento (unpublished)
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My current research work:
program choices, and drop out rates.
a broad reform on higher education student financing in Brazil. Developed by Paulo A. Meyer M. Nascimento This material can be used so long as the author is cited
either four or six thresholds (-4T
higher or lower threshold (-HT
either on marginal income (_MI-)
income (_TI-) either with (ICL-15_) or without (ICL- NS_) interest rate subsidy
ICL-15_ ICL-NS_ _MI-
_TI-
Source: Nascimento (unpublished)
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Gvrmnt real cost of borrowing Real rate
in ICL-15 scenarios Real rate
in ICL-NS scenarios Thresholds on monthly income Personal income tax burdens Thresholds for MI-4T scenarios Thresholds for MI-6T scenarios
Thresholds
for TI scenarios Repayment burdens (RB) for MI scenarios Repayment burden (RB) for TI scenarios 4T 6T HT LT 5.0% per annum 1.9% per annum 5.0% per annum BRL 1,174.12 (USD 367)
LT
BRL 1,787.78 (USD 559) 7.0% 1 2 HT 3.75% 3.75% 8.0% BRL 2,679.30 (USD 837) 15.0% 2 3 TI scenarios have only the initial threshold, which will be either LT or HT 7.5% 7.5% BRL 3,572.44 (USD 1,116) 22.5% 3 4 11.25% 11.25% BRL 4,463.81 (USD 1,395) 27.5% 4 5 13.75% 13.75% BRL 5,936.87 (USD 1,855) + No change
6 18.0%
Nascimento (unpublished).
Simulations consider student loan repayments being collected before income tax or social security contributions.
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0% 2% 4% 6% 8% 10% 12% 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% LINE: EFFECTIVE RB (IN %) AREAS: IMPLICIT SUBSIDY (IN %) PERCENTILES OF GRADUATES' INCOME (FEMALE ONLY) 0% 2% 4% 6% 8% 10% 12% 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% LINE: EFFECTIVE RB (IN %) AREAS: IMPLICIT SUBSIDY (IN %) PERCENTILES OF GRADUATES' INCOME (FEMALE ONLY)
Overall implicit subsidy: females, 43%; males, 23% Overall implicit subsidy: females, 57%; males, 41%
Overall implicit subsidy + default rate for FIES (currently time-based):
51%
Source: Nascimento (unpublished) interest rate at the same level as FIES’ 2015 new contracts (ICL-15_MI-6T scenario) interest rate set at the government’s cost of borrowing (ICL-NS_MI-6T scenario)
interest-rate subsidy (i
written-off-debt subsidy (i
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A BROAD INCOME CONTINGENT LOAN FOR BRAZIL?
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single enrolment in higher education, from both public and private sectors.
government.
eligible to income transfer and other social benefits – helps to identify graduates who are indeed poor.
to the others by an identification key common to all of them: the individual national insurance number (CPF).
number of international students are very low in Brazil as well.
administrative datasets provide rich information on the key variables to construct evidence-based ICL arrangements.
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similar tertiary programs offered in the private sector.
graduates studied.
at 2015 expenditure real levels (recall the bill tying public spending to inflation rate for the next 20 years).
income and performance on the National High School Exam (ENEM) + restricted to HEI performing well at the National Assessment for Higher Education (ENADE). Later on it could be linked to the proportion of loan recovery related to past loan disbursements.
cadastro único would be charged large fixed instalments – large enough to provide incentives for these graduates to reveal their income levels.
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To access a reference cited in this presentation, simply click on it when it appears and you will be redirected to a link to read or download it (not all references cited hereinbefore are available without a subscription, unfortunately). The only reference you may not find online is the one by Nascimento, from which this presentation reports repayment burdens for the Brazilian time-based student loan program as well as results for simulations
was not published yet at the time of this presentation. How to cite this presentation: Nascimento, P. A. M. M. (2017, May 30th). Higher education student financing: the Brazilian case (with some insights from and on the US). Seminar presented at Stanford Graduate School of Education, Lemann Center for Entrepreneurship and Educational Innovation in Brazil.
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paulo.nascimento@ipea.gov.br
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