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Indebted Generation, Part 2

Should Everyone Pay? This And Other Thorny Issues Regarding Existing Student Loans.

It’s time to accept that not all student loans can be repaid. We argue for segmenting borrowers by capacity to repay, as well as other policy measures.

By Ooi Kok Hin, Khairil Ahmad and Nelleita Omar8 July 2021


Baca Versi BM

In Part 1 of this research series, we outlined the quandary of student debt in Malaysia. By all measures, student debt has increased exponentially in Malaysia. Since the establishment of Malaysia’s primary student loan institution PTPTN in 1997, the number of borrowers has increased, average loan amounts have risen, and the amount required to fund these loans has ballooned. Each year, approximately 200,000 new borrowers are created as they seek access to higher education via student loans. 

A major problem highlighted in our previous article is the unrealised assumption of upward social mobility. The basic premise of student loans is borrowers’ ability to repay, thanks to higher earning potential from obtaining tertiary qualifications. However, multiple indicators show that many graduates do not have gainful employment, even before the onslaught of the COVID-19 pandemic.

The 2018 Malaysia’s Graduate Tracer Study (SKPG) showed that almost 60% of graduates were or remained unemployed a year after graduation. PTPTN also found that more than one-third of their surveyed respondents earn below RM2,000 a month. More seriously still, the combination of unmet higher earnings potential and the burden of student debt seems to impact B40 borrowers disproportionately as about 97% of the loan defaulters surveyed by PTPTN were from the B40 income group.

Who and how much to forgive?

If the policy preoccupation of the early 2000s is deliberate loan delinquency, recent years have seen concerns shifting towards involuntary loan delinquency due to unmet job prospects. This affects a segment of underprivileged and overburdened borrowers who are in a potent triple bind: disadvantaged by their household’s socioeconomic background, saddled with student debt and still facing low income mobility due to unmarketable qualifications.

Student debt forgiveness or cancellation, either fully or partially, is the leading policy proposal towards providing relief from repaying one’s student loans. In the United States, where astronomical student loans are a massive economic and political issue, student debt cancellation was a key plank in several presidential candidates’ 2020 election campaigns including Bernie Sanders, Elizabeth Warren, and incumbent President Joe Biden – the main difference across the candidates lay in proposed criteria and amount.

In Malaysia, then opposition coalition Pakatan Rakyat had campaigned for student debt cancellation in 2012-2013 following student protests led by Solidariti Mahasiswa Malaysia (SMM) and Gerakan Menuntut Pendidikan Percuma (GMPP). More recently, Lim Lip Eng, the Kepong Member of Parliament, recommended writing off PTPTN loans for B40 borrowers to release struggling families from their debts. Geoffrey Williams, an economist at the Malaysia University of Science and Technology had also called upon the government to recognise and write off PTPTN’s bad debts through debt cancellation.

Malaysia can and has implemented student debt cancellation to achieve assorted policy aims. To incentivise high levels of academic achievement, full loan cancellations have been offered since 2003 for PTPTN borrowers who complete their Bachelors’ degree with first class honours. As of 31st December 2018, 57,236 borrowers have been exempted from paying back their student loan under this scheme1.   

To incentivise quicker loan repayments, partial loan cancellations have been offered since 2013 for PTPTN borrowers who can settle their loans in one lump sum or who repay their loans consistently2. There was even partial student loan cancellation offered for lower income borrowers aged 60 and over in the 2019 Budget speech3.

As pointed out in a 2016 research piece by Penang Institute, some of these partial loan cancellation policies are regressive in nature. Students who graduate with first-class honours tend to secure more job interviews and better paying jobs compared to their peers. More affluent borrowers are better positioned to settle their loans in one lump sum compared to lower income families. 

Ultimately, student debt cancellation is not an untried measure in Malaysia when there is political will to enact. In view of this, rather than granting cancellation to those with better prospects to repay, we advocate targeted and partial student loan cancellation to the segment of borrowers identified as the most structurally underprivileged and overburdened.

A categorisation exercise on current borrowers is needed in order to determine who qualifies to be in this segment. Some factors that should be considered include their family’s socioeconomic background, the borrower’s past and recent years’ wages, the quality of qualifications received e.g. their field of study, level of their certification, and the status of the granting institution. 

The partial loan cancellation for this borrower segment should be an impactful or significant amount of their remaining loan, e.g. RM20,000 or 50-80% of their remaining loan. In addition, those in this identified borrower segment who have been paying their loans for over 15 years should have their full remaining debt cancelled, in order to graduate these borrowers out of student debt. Currently, there is no ‘graduating out of debt’ timeline, no matter the circumstance.

Critics may say, what about extending the loan tenure? In our view, targeted partial debt cancellation is a morally stronger policy option for such structurally overburdened borrowers than extending the loan tenure. Loan tenure extensions result in such borrowers paying more interest and trapping them in debt for even longer. 

Some state actors may be increasingly recognising the importance of relieving student loan burden. Early this year, the Sarawak state government through Yayasan Sarawak signed a Memorandum of Understanding with PTPTN to pay 30% of Sarawakian borrowers’ student loans once the borrowers pay 30% of their debt. Up to 9,000 borrowers from that state effectively had 30% of their debt ‘cancelled’ by this stroke of policy. 

Of course, it would have been a much more progressive policy if the minimum threshold were waived and greater settlement amounts granted to qualifying lower income borrowers. Nevertheless, despite the missed policy opportunity here, tracking this move would still be invaluable to see the impact on borrower welfare and other outcomes. Supporting research in the United States suggests that student debt cancellations can improve both family stability and upward mobility, increase borrowers’ likelihood to start a business, accumulate a down payment on a home, have a child, save more for emergencies, return to school, and boost the economy

On a separate note and in addition, the government should establish a grievance mechanism to investigate and potentially cancel debt for borrowers who have been misled by higher education institutions, or when a program is terminated or unaccredited, or when an institution is shut down, before the borrowers complete their studies4. At the time of writing, more than 500 students in Limkokwing University of Creative Technology (LUCT) were left with worthless degrees after provisional course accreditations were revoked by the Malaysian Qualifications Agency (MQA), with some students having paid up to RM72,000 in fees. Similar protection exists in Australia, to support student borrowers in the event that their education provider ceases in delivering their course or closes entirely.

Partial debt cancellation to encourage public service? As of the time of writing, the Canadian government offers to cancel $8,000 of student debt annually to doctors and $4,000 annually to nurses and nurse practitioners, as long as they work at least 400 hours in a remote or rural community. The benefit can be claimed for five years, which adds up to a significant amount of debt cancellation.

1 The cost of this loan cancellation was initially covered by PTPTN but shifted to the government since 2015. This group of borrowers represent 1.6% of the 3.5 million PTPTN borrowers as of 2018 and have had RM1.75 billion cancelled. Source: PTPTN Annual Report 2018.
2 Such discount incentives were introduced in Budget 2012 including a 20% discount for borrowers to settle their debt in one lump sum payment and a 10% discount for those who pay consistently for one year. These offers were discontinued/expired in December 2018.
3 Qualifying criteria was RM4,000 monthly income and below. The scheme was said to have benefited 350 borrowers with a cost of RM4.2 million.
4 The current policy to help affected students is by arranging credit transfers to another college. But we argue that students should be given the choice between transferring to a different college and continuing with their loan, or ceasing their studies and having their student loan cancelled.

Who should pay, when and how much?

Apart from the issue of structurally overburdened borrowers, two other questions pertaining to current outstanding student loans need to be resolved: when is it appropriate for borrowers to begin paying off their debts (threshold), and how much should they be paying (tiering)?

The default policy for PTPTN today is a time-based repayment scheme, where all borrowers are expected to commence paying their loan instalments 12 months after their graduation regardless of income level5. The current scheme does not differentiate borrowers’ varying levels of financial capability to repay their debts, which penalises those unable to pay as well as under-capitalises those who can.

The leading policy proposal to address this issue is the idea of income-based repayment where borrowers only begin to pay back their student loans after reaching an affordable level of income and where the repayment rate increases with rising income. The policy was first implemented in Australia. According to Bruce Chapman, professor at the Crawford School of Public Policy at the Australian National University6, Australia’s income-contingent loan system has inspired similar policies in New Zealand, South Africa, England, Hungary, Thailand, South Korea, and the Netherlands. Income-based repayment is considered fairer because repayments would be made only by those with feasible earnings while minimising hardship and default risk for borrowers earning less.

This policy was almost rolled out in Malaysia. Following the 2019 Budget speech by then Finance Minister Lim Guan Eng, PTPTN chairman Wan Saiful Wan Jan floated a plan called Scheduled Salary Deductions which sought to impose a progressive loan repayment schedule ranging from 2 to 15 percent of income depending on the borrowers’ monthly income7.

The plan was ultimately shelved due to fierce public backlash. One major source of backlash appears to be setting the monthly income threshold for loan repayment at RM2,000 (originally set at RM1,000, an astonishing figure considering that it is lower than the minimum wage) which many considered to be too low. Many borrowers were also upset that their monthly payments were scheduled for drastic progressive increases, from a typical RM150-RM 300 a month to up to RM1,200. Adding gasoline to the fire was the decision to make the changes mandatory and immediate.

In principle, we support income-based repayment as a way to facilitate higher and quicker repayments amongst borrowers with the capacity to repay. But a viable income-contingent loan policy needs to have a very good understanding of existing borrowers’ constraints and psychology.

Firstly, an income-contingent loan policy on existing borrowers should be implemented on an opt-in basis. Forcibly altering current repayment amounts without room for choice and flexibility, even amongst borrowers with relatively high incomes, will likely ignite anger and resentment as evidenced by the reception to the 2019 proposal. To motivate take-up of the opt-in scheme, one could take a leaf from the marketing of home mortgages, which shows a borrower how much more they stand to save or how much quicker they can get out of debt by increasing their monthly repayments.

Secondly, the threshold of repayment should be both economically and politically acceptable in order to avoid wholesale rejection of the policy. Setting an income threshold that is too low not only invites public uproar, it also sets up conditions for loan distress or default amongst low-income borrowers. In order to maximise policy acceptance and effectiveness, we propose that the threshold to repay is set at a level that allows for a minimum reasonable standard of living, either on par with the national median wage8 or a consumption-based figure such as the Belanjawanku by the Social Wellbeing Research Centre, which importantly also incorporates household size. As a benchmark, the Australian median personal income is $49,805 and their student loan repayment income threshold is currently set at $46,6209.

Thirdly, the tiering of loan repayments also needs to be acceptable to borrowers’ sense of personal affordability and choice. The tiering proposed by PTPTN in late 2018 was arguably too drastic. The tiering in Australia’s income-based repayment system, is much more gradual in its rate increases, had finer income bands and did not require payment exceeding 10% of their borrowers’ income. We compare the two tiering schedules in Figure 1 below.

Figure 1: Malaysia’s Proposed PTPTN Repayment Tiering 2018 vs. Australia

5 However, PTPTN does allow negotiations to restructure repayment on a case-to-case basis. Following the third round of ‘total lockdown’ imposed in June, the Minister of Higher Education announced that borrowers may apply for a three-month deferment to repay their loans.
6 And advisor to at least one major study on higher education financing commissioned by the Malaysian government.
7 To determine borrowers’ income levels, the government had worked out an inter-agency cooperation involving the Employers Provident Fund (EPF), Inland Revenue Board of Malaysia(LHDN), Retirement Fund Inc (KWAP), Accountant-General’s Department, Armed Forces Payroll Directorate and Public Service Department (JPA). PTPTN itself does not have automatic access to nor up-to-date records of its borrowers’ income.
8 Which has the additional benefit of moving in line with economic growth or contraction. The median wage figure is updated every year in the Salaries & Wages Survey Report; the latest available report (2019) has the median wage at RM2,442.
9 Up until four years ago, the threshold used to be around $56,000 but the Australian government gradually lowered the threshold to its current level.
10 Based on the latest B40-M40-T20 classification by the Department of Statistics.
11 Based on household percentile and annual income in a study by ACOSS/University of NSW.

But repayments will not be enough

The buzz around reducing borrower delinquency in past years may give one the impression that collecting repayments is the answer to PTPTN’s sustainability. However, the bitter truth is that even if all currently due outstanding loans were successfully repaid (which is highly unlikely), it would still not be sufficient to pay off PTPTN’s debts to financial institutions and to cover the cost of operations.

The gap between the interest rates charged by PTPTN to borrowers vs. the interest rates PTPTN must pay for its own borrowings is too large, as outlined in Part 1 of this research series. To illustrate the scale of the gap, in 2018 PTPTN collected RM400 million in interest repayment from borrowers but needed to pay RM1.7 billion in interest payments for its own borrowings12.

There is no option but to supplement PTPTN’s loan collections service these institutional borrowings with periodic government injections (as is the current practice) or outright takeover of the borrowings13. Either action must be funded by government revenues and taxpayers. Thus, the policy ‘solution’ in question here is less about how to close the financing gap (though, see ex-MP Rafizi Ramli’s suggestion to earmark oil revenues, amongst others14) and, in our minds, more about increasing the accountability and transparency in how PTPTN’s loans are funded. Given the current amounts involved, greater debate, analysis and oversight needs to happen. 

In the current governance structure, it is unclear how lawmakers can play a meaningful role in overseeing PTPTN, or who gets to decide on major reforms in PTPTN. There are many stakeholders involved including the Minister of Higher Education, the Minister of Finance, and even the Prime Minister whose support is necessary to enact (or veto) proposals to reform PTPTN. To increase accountability and oversight, it may be more effective to place the purview of PTPTN under a single ministry and to empower legislators in monitoring the body. 

What else would increasing accountability and transparency entail? Firstly, all studies commissioned by PTPTN and data collected should be made publicly accessible, and debated in parliament and/or select committees. Secondly, there should be formed – and empowered – both a parliamentary select committee and a parliamentary caucus on PTPTN and higher education financing so that elected representatives may provide increased debate, analysis and oversight. For instance, the Australian parliament has a Senate Standing Committee on Education and Employment, which allows lawmakers to deliberate on such matters and uphold public interest.

12 Loan interest revenue is the result of administrative costs 3% and ujrah 1% on student loans charged to the borrower.
13 Past examples include the bailout of FELDA and the gradual sukuk redemption in the restructuring of Tabung Haji.
14 In addition to proposing an Act to earmark a percentage of oil revenue into an education investment fund, Rafizi also proposed the issuance of new government bonds to cover PTPTN’s debts as an alternative.

Conclusion

This instalment of our research series on student loans in Malaysia advocates three bold policies to address issues related to current outstanding student debt: targeted partial debt cancellation, income-based repayment, and greater oversight on the workings and financing of PTPTN. In supporting these policies however, we reiterate the call for publishing all commissioned studies and data connected to PTPTN and higher education financing. Having more robust and in-depth policy research on student loans and higher education financing requires the public availability of micro-data as well as the contribution of all interested researchers, legislators and policymakers – not just a chosen few. Impact estimates of the above policy measures, such as this one by the Levy Institute for the United States, cannot be done for Malaysia with publicly available data. 

A Select List of Studies on Student Debt in Malaysia

Chapman, Bruce and Michelle Tan. “The Australian University Student Financing System: The Rationale for, and Experience with, Income-contingent Loans”, in Student Loan Schemes. Experiences of New Zealand, Australia, India and Thailand and Way Forward for Malaysia, USM Press. 2009. 38-63.

Hock-Eam, Lim, Russayani Ismail, and Yusnidah Ibrahim. "The implications of graduate labor market performance in designing a student loan scheme for Malaysia." In Income Contingent Loans. Palgrave Macmillan, London, 2014. 83-97.

Ismail, Russayani. “Equality of opportunity and student support schemes” In: The 5th ASEAN Symposium on Educational Management and Leadership (ASEMAL 5), 18-19 August 2007, Legend Hotel, Kuala Lumpur. 2007 (Unpublished).

Ismail, Russayani. “A Review, Investigation and Recommendation for National Higher Education Funding (Kajian Menyemak, Mengkaji dan Mencadangkan Transformasi Pembiayaan Pengajian Tinggi Negara". Ministry of Education and PTPTN. 2012.

Ong Kian-Ming, Jonathan Yong, Chew Khai-Yen and Dickson Ng, “The Sustainability of the PTPTN Loan Scheme”, Penang Institute, December 2016.

Pakatan Harapan PTPTN restructuring proposal (undisclosed).

PTPTN Survey in 2019 (unpublished).

PTPTN Public Consultation Paper, April 2019 (partial publication to the public).

PTPTN Strategic Plan 2021.

PTPTN Strategic Plan 2021.

Wan Saiful Wan Jan, “Malaysia’s Student Loan Company: Tackling the PTPTN Time Bomb,” ISEAS-Yusof Ishak Institute, April 2020.

Good policy research that can satisfy the needs of economic, social and political feasibility will be needed not only in addressing issues related to current existing student loans but also in working out changes to new student loans moving forward. In the next part of this series, we will discuss the broader changes needed in the policy of student loans and higher education financing in the future.


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