Financing higher education - what the debaters missed

I watched the first debate between youth of the two major political parties and noted that they have both latched on to higher education funding as a campaign issue.

One side has declared that it will reform the Students' Loan Bureau (SLB), with no information on the nature of the reform being contemplated. The other side has only pointed to some changes coming out of the SLB, such as the lowering of interest rates and extending the repayment period.

Both parties have also pointed to the idea of income-contingent loans as a future direction.

They have, however, failed to focus on the real problem facing the SLB. Some fundamental issues that must be addressed are the undercapitalisation of the SLB, the effect of the moratorium on the Students' Loan Fund, the high default rate, and the limited funding sources for human capital development in Jamaica.

Undercapitalisation of SLB

On September 16, 2010, the Government of Jamaica (GOJ) revealed that it had guaranteed a US$20-million loan from the Caribbean Development Bank for the SLB. Finance Minister Audley Shaw, in his 2011-12 Budget presentation to Parliament, also indicated that the SLB would benefit from a portion of the PetroCaribe Loan Fund.

Notwithstanding these two efforts, it has been voiced by the SLB that the agency's capital base is insufficient to deal with the current demand for loans. The fund currently only assists students in paying their tuition fees. Such fees, I hasten to point out, are the subsidised fees: 20 per cent on average, in the case of the University of the West Indies, and up to 60 per cent in the case of the University of Technology and other national tertiary institutions. The bureau is currently struggling to ensure that it has enough cash flow to deal with the approved loans.

The minister of education and now prime minister, Andrew Holness, earlier indicated that the SLB would need in excess of J$20 billion if it is to address his proposal to fund through loan at 100 per cent instead of the subsidised student fees at the tertiary level.

None of the parties at the debate addressed the crucial issue of how to properly capitalise the Students' Loan Fund in order for the bureau to deal with the current and future demands.

Another critical issue is the moratorium effect on the Students' Loan Fund. In order to be effective, the fund has to give a moratorium during the study period on repayment of principal. This allows students who are not earning during the period to defer repayment for the period of studying. On completion, repayment begins.

There are two effects of the moratorium. First, it puts a strain on the cash flow of the bureau, as all funds on loan are out of the system for four years or more. For a regular financial institution, this is not so, as repayment begins almost immediately.

Second, it increases the cost of the loan to the student, as the interest is accrued and used to capitalise the loan. My calculations revealed that this adds as much as 10 per cent to the cost of the loan. A student borrowing, therefore, at 12 per cent could end up repaying at a rate of 22 per cent because of the moratorium cost.

The bureau cannot put a moratorium on the interest, as this could have the effect of depleting the fund, which has to be sustainable by its nature since it is revolving. It would have been good to see, in the youth political debate on December 10, thought being given to strategies of raising funds to increase the capital base of the SLB and how to reduce the cost to the students caused by the moratorium period.

The chancellor of UTech, Edward Seaga, has been voicing the need for Jamaica to float an education bond, part of which could be used for capitalising the SLB. I urge consideration to be given to this matter. Also, it is about time that another approach be made to a multilateral institution for a substantive inflow of new funds. The World Bank loan of 1995 was the last time that such an effort was made.

Lukewarm Private Sector

One needs also to address the role of the Jamaican private sector in the human capital development of the country. In 1990, with the urging of the World Bank, the management of the Students' Loan Fund was transferred to the commercial banks. The experience revealed that the banks did not do a good job and so the management had to be transferred back to the SLB. It is thought that the Bankers Association of Jamaica could pool its effects together and lend some of its funds to the SLB for financing higher education. Thus far, there have not been favourable results for this idea.

The private sector needs an educated workforce and must play a role in developing that workforce. May I suggest that a role it can play is to assist in building the capital base for financing higher education?

Dealing with Delinquency

A 70 per cent delinquency rate is outrageously high for any financial institution. Time Moneyland reports that for the United States, the level of delinquency was 11.2 per cent as at August 2011. This, they claimed, was signalling a crisis. Efforts to enable the SLB and other financial institutions to effectively manage delinquency have been too slow in coming. Among the proposed changes to the Students' Loan Fund Act have been the following:

Powers to enable the SLB to garnish the wages of beneficiaries.

Making it compulsory for beneficiaries to inform their employers of their indebtedness to the SLB.

Making it an offence for anyone to provide the SLB with false information.

Powers to enable the SLB to bar institutions from providing transcripts and certification for delinquent borrowers.

These proposals have been before respective political administrations for more than five years. It would have been good to hear the debaters explain the reasons for the protracted inaction and what they would do to bring closure to this matter.

While positing higher-education funding as a major issue to be tackled in a new administration, the debaters missed the mark by omitting some fundamental issues at hand. Let us hope that in the leadership debate on Tuesday, the same mistake will not recur.

Dr Kofi Nkrumah-Young is associate professor in education financing and VP, planning and operations, UTech. Email feedback to columns@gleanerjm.com.