Student Loan: Examining implications and lessons from around the world

Seven days ago, President Bola Ahmed Tinubu signed into law the Student Loan (Access to Higher Education) bill offering students who are struggling financially with interest-free loans.

The Act, which replaces the Nigeria Education Bank Act, makes federal loans available to needy students so they can pay for their tuition fees. The Access to Higher Education Act aims to expand everyone’s access to higher education.

Difficulties in paying for higher education are becoming a worldwide issue. African countries that have implemented universal primary education (UPE) and universal secondary education (USE) programmes, which have increased enrollment rates, are in dire condition because there are more citizens eligible for higher education.

In addition to creating financial difficulties, these developments have compelled many national governments in Africa – which for decades had been a major source of funding for higher education – to look for alternative funding sources in order to meet the rising demand for higher education in their respective countries. In response to this difficulty, student loan programmes have gained popularity in a number of African countries, including Ghana, Kenya, Tanzania, Namibia, South Africa, Ghana Rwanda, and Uganda.

There are many different justifications for choosing student loan programmes. Historically, a state-supported student loan programme is not only desirable for aiding the government’s budget but also for the benefit of the students and their families because, in addition to relieving the burden on public funds, it would allow students to study now and pay for their education later when they are receiving the higher salaries that typically go to university graduates.

Long ago, the majority of countries in the world sponsored higher education mostly with public money. However, when the need for higher education increased without a corresponding rise in many nations’ budgets, some national governments looked for alternate funding sources, including student loan programmes.

Over 60 or 70 years ago, a few nations began offering small-scale loan programmes to students pursuing higher education. However, actual student loan programmes on a large scale started to emerge in the 1950s and 1960s, primarily in developed and a few developing nations.

Government-sponsored student loan programmes are already in place in more than 70 countries around the world, and they all share one important trait in common: they are all heavily subsidised by the government. In contrast to commercial loans, a sizable portion of the total amount of money that the loan body spends on the programme is frequently not repaid.

In most nations where student loan programmes are active, the gap between total loan disbursements and total loan recovery is typically explained by two factors: first, the loan programmes’ built-in interest rate subsidies. Second, there are operational inefficiencies with the programmes, as seen by significant repayment default and high administrative expenses.

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Examining the provisions and implications of Nigeria’s Student Loan

Many Nigerians celebrate the Student Loans scheme and some have applauded Tinubu for taking on challenging issues. It is important to unpack the Student Loan scheme, ask the hard questions and seek appropriate answers.

The Student Loan gradually shifts the burden of funding higher education away from the government to students. It starts the process of removing education subsidies because universities would naturally raise tuition fees. In fact, public universities have laboured under poor funding, and this is an opportunity to raise tuition. School fees will go up above the loan amount because the Federal Government has announced that it cannot continue to fund university education. And students who can no longer afford to pay would be advised to go for the Student Loan.

But this is not straightforward as the experience with the national mortgage scheme has shown. Accessing the Federal Mortgage Bank of Nigeria-backed mortgage has been almost impossible for Nigerians who have attempted to do so. But let us return to the provisions of the Student Loan scheme and the initial bottlenecks that must be addressed for it to work. The terms and conditions say:

An applicant or his parents must provide tax clearance. The applicant or his parents must be earning a total income of less than five hundred thousand naira a year.

A back-of-the-envelope math shows that earning five hundred thousand naira a year means that the husband and wife (the household) are earning less than forty-one thousand naira a month. That is twenty thousand naira, while the minimum wage is thirty thousand naira.

This means if both parents are earning more than twenty thousand naira, the applicant is automatically disqualified because they are either earning more than forty-one naira or they do not pay tax because you cannot pay tax on a salary below minimum wage.

Here is a bigger paradox of the Act. These two people earning less than fifty thousand naira will have to provide a director in civil service and a lawyer of 10 years in service as guarantors. This is tricky, hang on.

The director and lawyer have to surety that if the applicant defaults, they will pay the loan. It will be tough or almost impossible to find a director who will take such surety.

However, assuming the applicant scales these hurdles, the Act says that the loan will be given when funds are available. In other words, the applicant is still at the mercy of the system.

It gets trickier with the provision that if a Student Loan beneficiary fails to start repaying two years after graduation they will already be in default and go to jail. But many graduates might not have gone for the National Youth Service Corps two years after graduation.

Student Loan: Best global practices

Determining the “best” student loan scheme is subjective and can depend on various factors such as loan terms, interest rates, repayment options, and overall student satisfaction. Several countries are known for having well-regarded student loan programmes. Here are a few examples:

Sweden’s student loan system is often praised for its borrower-friendly terms. Students in Sweden can access interest-free loans to cover their tuition fees, and repayment is income-based, ensuring that graduates are not burdened by excessive debt.

Norway offers a robust student loan system that provides low-interest loans, grants, and scholarships to eligible students. The loan repayment is based on income, and loan forgiveness options are available for certain professions.

Australia has an income-contingent student loan programme known as HECS-HELP (Higher Education Loan Programme). Under this scheme, students are not required to repay their loans until their income reaches a certain threshold, and repayments are automatically deducted from their wages.

Germany offers tuition-free education to both domestic and international students in many public universities. While not strictly a loan scheme, the absence of tuition fees reduces the need for students to rely heavily on loans to finance their education.

New Zealand has a comprehensive student loan programme that provides loans to cover tuition fees, course-related costs, and living expenses. The repayment system is income-based, and there are various loan forgiveness options for graduates who work in specific fields.

It is important to note that the effectiveness and success of a student loan scheme can also be influenced by factors such as the country’s overall economic situation, higher education policies, and support structures in place. Additionally, each system has its own advantages and disadvantages, so what may be considered the “best” loan scheme for one person may not be the same for another.

Wrapping up

To resolve the potential difficulties with finding a guarantor, the Federal Government could borrow a leaf from Ghana. The Student Loan Trust in Ghana started with applicants requiring guarantors. However, the West African country has evolved a robust system of national identification that dispenses with guarantors. Applicants can apply without guarantors.

The Federal Government has to also clarify how households earning less than the minimum wage would be able to provide tax clearance certificates when they are not required to pay taxes by law.

It is also important to review the provision stating that beneficiaries who fail to start repaying the loan two years after NYSC go to jail. Repayment must be income dependent. This means repayment would be income-based as we have seen among the best global best practices.