Student loans: The other perspective

COMMENTARY

By MICHAEL KABUNI
IMAGINE this: You’re a University of PNG student accessing the Help fund.
To reside at UPNG’s Games Village each student is required to pay approximately K12,000 per year, unless you are on Hecas or Aes, in which case you pay about half.
Assuming they all graduate after four years, each student owes the state K48,000 – without interest.
High costs, generous offer from the Government, looks real great. Does it?
Below are scenarios you ought to know before you and your parents decide whether to get these loans, and how much to get.
The student completes fours years’ bachelor degree and gets a job. The repayment is tied to your income (income -based repayment). Your first pay will have at least two deductions, tax and automatic deduction to repay your student loans. The details are not yet released, but here is how the US and Australian governments structure repayments:
A. A minimum income threshold is set so that graduates earning low incomes delay their repayments. Just like low-income earners are exempted from paying taxes, graduates with low income (let’s say K600/fortnight) do not repay student loans. After exceeding threshold the graduates start repayments.
B. Beyond the threshold, the graduate pays progressively higher rates. The higher your income, the more you pay.
Sounds cool right? Not so fast. Research in both the US and Australia show that student loans do have negative implications.
First, with a degree, the graduates will start earning higher wages, higher than the exemption threshold for student loan repayments. They will not be exempted from either taxes or repayments, from the very first pay. It will affect many decisions in life. Marriage, buying a car, starting a business, and just about anything that requires money.
All bachelor degrees cost the same at UPNG (apart from medicine) but not all degrees earn the same when you start working. It’s the same for most universities. There are those that earn higher because of the type of degree or the type of job/sector they are employed in. Graduates in high paying jobs will pay off their loans faster than the others.
Second, it gets tougher for those who may want to take loans to start a business, buy a car, buy a house, etc. One of the non-compromising conditions of the commercial banks is whether the individual has outstanding loans. A graduate with K48, 000 debt has lower chances of successfully applying for loans from commercial banks. Any graduate with student loans will have to deal with this challenge.
Third, there is sometimes a disincentive for those in low paying incomes with exemptions to work hard and climb up the income ladder. They would want to delay the repayments as long as they could. Because the repayment is progressive, even those above the exemption mark would always be conscious that higher income equals higher taxes and higher repayment rates.
The state itself will have its share of problems with non-repayments. What if the graduates do not repay and debts start to accumulate? Student loans in the US alone are a staggering $1.4 trillion (+K4 trillion).
The Australians and Americans solved this by further reducing the exemption threshold and increasing the repayment rates. This doesn’t help the graduates.
Also, what happens to graduates who don’t get into formal employment where a portion of the income can be automatically deducted? After 25 years US forgives the loans. Australians are less generous, they don’t forgive the debt. We don’t know how generous our government will be until the complete policy is published.
Noble Prize winning economist Joseph Stiligtz equates the student loans in the US to the housing bubble that led to the 2008 economic crisis. The access to finance and the promised benefits is enticing. But with limited market for those graduating, it runs the risk of a bubble.
In both Australia and US, access to student loans by students attending all institutions led to so many profit-oriented institutions entering the higher education space.
Institutions compete for students, who rely on loans to pay their tuitions, with loans they will struggle to repay later. These institutions provided qualifications for profit, produced low quality qualifications, and students and the state struggled later. Students struggled to find jobs, the state struggled to get back its money.

• Michael Kabuni is a lecturer with the Political Science department, UPNG.