International Higher Education, Spring 2004

Student Loan Financing in the University Sector in Thailand

Gamon Savatsomboon
Gamon Savatsomboon is director of the Northeastern University Graduate School. Address: Graduate School, Northeastern University, 199/19 Mitraphab Road, Muang, Khon Kaen 40000, Thailand. E-mail: gamon_s@yahoo.com.

In October 1996, Prime Minister Thaksin Shinawatra announced two major policies for the university sector: the income contingency loan (ICL) and the voucher scheme. This article discusses the context in which ICL was developed and the programs’s impact on the Thai university sector.

The Education Loan Fund
In 1996, the Education Loan Fund (ELF) was established, becoming operational in 1997. In 1998, the Education Loan Act (ELA) was passed to provide a legal framework. The Education Loans Office (ELO) was subsequently established. The stated purpose of the ELF was to increase higher education access solely for students of disadvantaged economic status. The Thai concept of the loan fund is borrowed from the Australian example.

Three ministries are involved in the provision of the ELF: the Ministries of Education and of Finance and the Commission on Higher Education. The ELF is managed by the ELF Committee. Krung Thai Bank is responsible for loan execution.

Problems with Loan Defaults
The ELF faces major problems stemming from the false information provided by students and loan defaults. Borrowers provide false information (e.g., on parents’ incomes) to qualify themselves for the loans. Loan default is a serious threat to the financial stability of the ELF.

Based upon 2002 data, in December 2003 Matichon Newspaper reported that 33 percent of 464,565 students whose loan payments were due were not making repayments. The ELO had lent a total of 150 billion baht (about U.S.$3.75 billion) to 2,001,068 students. Of these, 532,355 students were in a grace period, 1,003,148 students were studying, and 465,565 students had outstanding loan payments. The ELO has requested that universities conduct field surveys to establish the veracity of data provided by students in an early attempt to deal with the problem of false information.

Student Loan Financing
Education reform in Thailand is an ongoing process. A Ministry of Education subcommittee responsible for financial reform in the university sector recently conducted a study on student loan financing in Thailand in order to propose long-term solutions to financial control issues.

This study endorses the principle that public universities be privatized on the grounds that economic benefits (earnings) accrue to those students who possess higher education. The Thai “user-pay,” concept, following Milton Friedman’s ideas, was developed in the 1970s by Dr. Prachumsook Archeva-umrung, who suggested it be employed as a means to finance public universities in Thailand. The ministry study concludes that the costs of education should be borne by students.

The study offers two major recommendations: first, that student loan financing should be shifted from supply-side financing to demand-side financing through a voucher scheme; and second, that public universities should also be privatized, adopting a user-pay model.

The Current Student Loan Scheme
The ELF is based on supply-side financing. As such, the government gives resources (i.e., money) to universities on a quota basis. Students apply for loans (covering tuition and fees and living expenses) through universities. Students must start to pay back loans (principal plus 1 percent interest) two years after graduation or discontinuance of study. The loans must be paid back in full with interest within 15 years. One major drawback to this system involves graduates who remain on very low incomes or are unemployed.

The Income Contingency Loan
Friedman’s “human capital contract” provides a basis for the income contingency loan (ICL). The maxim of the human capital contract is that a student receives funding (e.g., a loan) in exchange for a fraction of future earnings (after graduation) for a fixed period of time. Such contracts are equity-like instruments because the government's returns are contingent upon student earnings, not a predefined interest rate.

In the proposed ICL, students borrow money from the ELF for tuition and living costs. However, it is proposed that students’ costs be borne by three parties: government, parents, and students. Those students who do not take out student loans and pay cash would be available for a “discount” from both public and private universities, which the government reimburses to the universities.

Unlike the existing loan scheme, the ICL is available to all students. Also, the ICL is an interest-free loan. However, the principal that students need to pay back if they exceed an income threshold is tied to the consumer price index. Thus, the total amount of money students need to pay back is less contingent upon their future incomes. This is a deviation from the fundamental concept of ICL.

The government proposes that individuals who make payments higher than those stipulated in the loans be eligible for additional deductions on the principal. For those students who could not reach the earning threshold, the government would absorb the costs. Finally, the study proposes a dedicated collection agency be appointed to replace the Krung Thai Bank. The new agency would share the Revenue Department of Thailand database to track individual graduates' earnings, and the department would be used as a channel to collect loan repayments.

Interestingly, loan repayments are treated as “debt,” not as a “graduate tax,” and therefore enforcement may be problematic, as defaulting students would be subject to weak civil penalties rather than criminal penalties.

Conclusion
Obviously, the ELF faces two major problems. First, a significant number of students are providing false information (e.g., on parents’ incomes) to qualify themselves for student loans. No concrete measure to correct this problem has been put in place by the ELF to date. Second, the ELF faces major problems with loan defaults.

The ICL is an alternative method of financing and correcting this problem. Presently, the ELO relies on students’ integrity for loan repayments. With the ICL, the government proposes more serious efforts in enforcing repayment.

However, there are human rights issues to bear in mind. For example, the option of denying certain public services (e.g., the issuing of house registration services) to those who do not pay back their student loans has been suggested by the government. The concern is that this is a mechanism that would degrade individual rights.

The ICL is a method to increase higher education access to students regardless of their economic status. Nevertheless, the question remains whether the ICL would be able to solve the current loan default problems.