Financing Higher Education in Indonesia: Accessing Feasibility of an Income-Contingent Loan System

Abstraksi

Higher education in Indonesia is mostly funded by private fees (e.g., student fees and other self-generated funds). The contribution of private fees (i.e., tuition and other fees and levies) constitute three-quarters of the total spending of higher education (World Bank, 2010), while financial aids cover only a small portion of education necessities and have limited coverage. This has resulted in low tertiary education enrollment in which the gross enrollment rate at higher education level was only 26.3% in 2010 (Hill & Thee, 2013). To increase access to higher education, students need support from a better government financing policy, especially those coming from more disadvantaged background. An alternative is to create a student loan system. Generally, there are two types of student loan systems. The first type is a mortgage-type loan for which the repayment period is already set. This type of loan usually entails a high repayment burden (RBs), especially among debtors with lower incomes; hence, it increases the risk of default. The second type is an income-contingent loan (ICL) system, for which debtors start repaying after their income reaches a certain threshold. Therefore, the length of repayment is not fixed upfront. This is a scheme practiced in many countries such as Australia, Sweden, England, and Germany. An early analysis of mortgage-type student loan in Indonesia predicted RBs as high as 20%-50% among different quintile groups that would pose financial difficulties for the majority of borrowers (Suryadarma, 2013). The significant feature that differentiates an ICL from a mortgage-type loan is that a predetermined income signals the start of paying off the debt. Debtors are expected to start paying off their loan once their income reaches a certain threshold, with the RB set at a relatively low proportion of the income. When income is low then the absolute amount of repayment is low and the repayment amount increases as income increases. This feature, which follows the age-earning profile, will inevitably smooth the repayment process, enabling more people, including those coming from disadvantaged families, to participate in higher education (Chapman, Higgins & Stiglitz, 2012). Cross-country comparison of RBs showed that mortgage-type loan usually has RBs that exceed the ideal rate of 8%. Shen and Ziderman (2009) showed that an RB of around 8% is still feasible. This paper examines the feasibility of an ICL system to finance higher education in Indonesia. Using graduates’ income data from the 2015 National Labor Force Survey, we modeled the life-cycle income distribution of university graduates using unconditional quantile regression. We used these estimates to simulate different ICL schemes to observe the effect on the amount of repayment, length of repayment, government subsidy, and repayment burden of males and females in different quintiles of income. We utilized three loan schemes: without real interest, with 25% surcharge of the total loan, and with 2% real interest. Then we utilize 8%-10% of repayment burden on the loan. The repayment period is set at 25 years starting from the first year of repayment, after which the outstanding debt is written off. The analysis is done separately for working graduates and all graduates (including those who are not working). Loan repayment starts after male and female graduates reach the median income in both groups. Among working graduates, we found that—for both male and female graduates—a distinct feature is that government subsidy is consistently higher among females. The higher government subsidy is indicative of the gender earnings gap. We also found that applying a real interest rate results in graduates in Q25 having to pay the highest total loan repayment compared to the others. Although this results in a lower government subsidy, policymakers need to consider the equity aspect of a policy that results in lower-income earners paying more than higher-income earners. A more feasible scheme for male and female graduates to reduce the government’s subsidy is adding a 25% surcharge toward the total loan. Despite the relatively longer period of repayment, the government can expect to provide smaller implicit subsidies. Among males and females, a 10% RB with a 25% loan surcharge results in the lowest implicit subsidy. However, when including female non-working graduates in the analysis, those in Q25 will only be able to repay up to 50% of their debt at the age 60 using all schemes. This is because they constitute more than two thirds from these idle graduates, indicating that higher support is necessary among this group of beneficiaries. However, implicit government subsidy was consistently lowest with the 25% surcharge scheme. Therefore, increasing the repayment burden up to 10% is still within the range of acceptable burden and could reduce repayment duration by 3–4 years and reduce government’s implicit subsidy. Result shows that ICL with lower repayment burden is feasible in Indonesia and can increase access to higher education. Another important discussion that we have yet to touch upon in this paper is that an ICL system requires reliable lifetime income documentation, which can be easily done when graduates are working in the formal sector. Using a benchmark mechanism explained in Barr (2018), we believe that the mechanism for loan repayments will be easily applied among those working in formal sectors the same way as withholding income taxes, government insurance, or other social security contributions. However, a deeper discussion is still needed to ensure that those in informal sectors are reached. In conclusion, the ICL is more feasible than the mortgage-type loan. There are many ways in which ICL can be implemented and all of them would guarantee smaller RBs and protection against periods of hardships for graduates. However, there must be a discussion in the government to establish good policy support to implement a successful ICL program. This is where the discussion should proceed next.