International Higher Education, Winter 2001

The Jamaican Student Loan Scheme

Kin Bing Wu
Kin Bing Wu is senior education economist, Department of Human Development, Latin America and the Caribbean Region, The World Bank, 1818 H St. NW, Washington DC 20433, USA. E-mail: <kwu@worldbank.org>.

Jamaica is the largest English-speaking country in the Caribbean, with a population of about 2.5 million and a per capita GDP of about U.S.$1,680. It has inherited an English education system with a very elitist higher education subsector. In 2000, enrollment of nine years of primary and junior secondary education is practically universal, but only 60 percent of the relevant age group is enrolled in senior secondary education and less than 15 percent in tertiary education institutions. Nonetheless, the demand for tertiary education is growing, particularly from the middle and working classes.

Public resources, however, have been severely constrained as Jamaica experienced either low or negative economic growth throughout most of the 1980s and 1990s. Public expenditures on education are as high as 7 percent of GDP, and tertiary education expenditures account for about 22 percent of the total. Fiscal deficits put pressure on public tertiary education institutions to recover a higher percentage of their cost from students than before. In 2000, tuition fees ranged from about 10 percent at teacher training colleges to nearly 18 percent at the University of West Indies. The combination of the growing demand for tertiary education from the middle and working classes, and the need of the government to pursue cost recovery thus made it necessary to increase student loans and grants to enable students to finance tertiary education.

Student loan schemes in Jamaica have a long history. The Students’ Loan Fund Act of 1971 established the Students Loan Bureau (SLB) as a statutory body authorized to make loans to Jamaican nationals pursuing higher education in Jamaica or in other parts of the Caribbean. Eligibility was means-tested. A Students’ Loan Council set policies for the SLB. In the early days when tertiary education was practically free, student loans were very small in amount and were used to cover various student expenses. The average number of loans processed annually increased from 1,000 in 1971 to some 6,000 in 2000. In the 1970s, approval rates were over 90 percent of applicants; at present, they are still over 80 percent. In recent years, the average loan amounted to about $1,000.

The Student Loan Fund was intended to operate as a revolving fund, maintained by investments, repayment, and government contributions. However, because of the historically negative interest rates, high administrative costs, and low repayment rates, the fund has depended mainly on government funding and external borrowing—two Inter-Amercian Development Bank projects (U.S.$8 million in 1971, and U.S.$8.5 million in 1976) and two World Bank projects (U.S.$3.5 million in 1987 and U.S.$28.5 million in 1996).

The scheme has been redesigned a number of times. At first, it was managed by the SLB and funded by government budgetary allocation. In 1993, the Bankers’ Association (and its members) was brought in to subscribe an Education Bond issued by the SLB. The trust fund was managed by the West Indies Trust Company and the loans were processed by the SLB, while the government guaranteed principal and interest in the event of default. This scheme proved to be unsustainable for the above-mentioned reasons. In 1996, the arrangement was changed once again. The SLB continued to determine eligibility of applicants, but commercial banks played a key role. The banks assessed whether the loan recipients could provide collateral.

If they could, the banks would assume repayment risks; if not, the government would guarantee the principal and interest. The banks also handled disbursement and collection and were compensated by administrative fees. Interest rates were fixed and capitalized during the course of study, but were floated at 5 percentage points above the passbook saving rates after the student graduated. The interest rates were positive and above inflation rates but were still below the market lending rates. This scheme, however, was not successful because the banks did not find it profitable, classifying almost all loans as government guaranteed, while students were outraged to be asked to provide collateral.

In 2000, the design was again restructured to centralize administration in the SLB from application processing to disbursement and collection in order to make it easier for students to deal with only one organization and for the SLB to have a greater sense of ownership and accountability. The long-term goal is to convert the SLB into a self-funding organization that will borrow from the private sector and sell its loans to a secondary market. The government’s role is to reinsure to facilitate liquidity. Thus far, only centralization of administration has been achieved. Collection must be improved before the student loans will be seen as profitable on the secondary market.

Given the long history of providing student loans, many lessons have emerged: how interest rates should be set, how to involve the private sector, and how to improve administrative efficiency by using technology to assist loan processing, disbursement, and collection. The administrative capacity of the SLB, together with the existence of institutions for tracking repayment in society (such as credit bureaus), is critical in determining whether a certain design can be implemented. Ultimately, the sustainability of a student loan scheme hinges on whether the economy is growing, whether students can find employment, and whether emigration is common among graduates from tertiary education institutions. If a student loan scheme is financially unsustainable, governments would be well advised to meet the demand for higher education while containing costs through lower cost alternatives, such as distance tertiary education or twinning programs with other universities to make it more affordable for students.