Essays on economic analysis of student loans

Abstract

"This thesis contributes to the student loan literature by addressing the issues of interest rate subsidies and repayment burdens; it also demonstrates both conceptually and empirically how the interactions between these two components form the basis for trade-off for government between the interest rate charged on student loans and the expected aggregate loans recovery. Chapter 2 measures the extent of interest rate subsidies implicit in the design of Thailand's 2006 scheme, Thai Income Contingent Allowances and Loans (TICAL), and two alternative hypothetical income contingent loan (ICL) arrangements. The subsidies for TICAL-type arrangements and for a typical debt size of 200,000 Baht are between 25 and 40 per cent on average, but about zero for the alternative ICLs. With a disaggregated earnings approach and typical current debts, subsidies for TICAL-type schemes are estimated to be about 30 to 55; the two alternative ICLs are associated with interest rate subsidies of 3 and 18 per cent. With very large debts, however, the subsidies of all schemes are as high as 25-60 per cent. The results from two alternative ICLs suggest that, with appropriate first repayment arrangement and effective collection agency, ICL can be a viable option for a moderate level of debt. Chapter 3 attempts to estimate empirically optimal levels of interest rate subsidies. Based on Diamond and Mirrlees (1971) Production Efficiency Theorem and Bovenberg and Jacobs (2005)'s optimal income tax and subsidies model, the chapter proposes several empirical strategies to make the model operational. It is found that if policy-makers chose to use this mechanism to correct the distortions associated with the imposition of income taxes on graduates, the current implicit interest rate subsidies on Thai student loans would be considerably lower than they currently are, but not zero. Chapter 4 contributes to the student loans reform debate by demonstrates empirically the inverted u-shaped relationship of this trade-off using current Thai Student Loans Fund (SLF) repayment arrangements as a case study. The empirical exercise reveals that with a typical loan size of 200,000 Baht and repayment burden of 8 per cent, the maximum expected aggregate loans recovery is about 40 per cent; this means that interest rate subsidies are in the order of 60 per cent. Given the fact that the expected aggregate loan recovery of the SLF is around 35 per cent, any reform in the context of current SLF design will not offer much improvement in terms of collection. There is a clear policy implication from these exercises. A mortgage-type loan such as the SLF does not function properly as a student loan. Generous subsidies offered by the scheme make it a grant system, requiring financial support from the government. An ICL arrangement similar to the two hypothetical ICL schemes proposed in Chapter 2 can offer a potential improvement in terms of reducing interest rate subsidies. This new ICL scheme can be implemented through the existing social security system whose coverage is as extensive as the tax system." -- provided by Candidate