As Malaysia approaches high-income status, local tertiary education is becoming increasingly crucial in enabling Malaysians to secure high-paying jobs. Unfortunately, today’s rising demand for tertiary education has also left graduating students with a growing mountain of debt. According to a 2019 report by the Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN), about half of the 1,866 borrowers had an irregular income or made less than RM2,000 per month after graduation (Yeap, 2022). As a result, many graduates end up deferring their repayments as they rest on the brink of defaulting on their student debts.
Abdul Hamid (2022) discovered that tertiary education and economic growth have a positive and bi-directional relationship in the long run. This means that as more students pursue higher education, the nation’s economic growth also increases. However, as more graduates face difficulties in servicing their student debt, their disposable income and levels of consumption and investment will decline, potentially reducing overall economic activity. As student debt is expected to grow exponentially in the future due to an increasing population, a student debt forgiveness programme could be one of the potential short-term solutions. However, it may cost the economy an exorbitant price and spark societal behavioural changes.
The Argument behind a Student Debt Forgiveness Programme
In 2016, a study was conducted using the simulations of Moody’s and Fair’s economic models with assumptions to evaluate the effects of student debt forgiveness schemes over ten years in the United States (U.S.).
It is not a surprise that a student debt crisis has brewed in the U.S., considering the costs of education in the U.S. can range from $10,423 (RM47,107) in a public state college to $39,723 (RM179,528) in a private college for the 2022-2023 academic year (Kerr & Wood, 2022). The high cost has pushed students to take on loans to pay for their tuition fees.
If student debt were to be ‘forgiven’, the estimated economic effects are as follows:
- Real GDP is estimated to grow between $861 and $1,083 billion over 10 years (the base year being 2016).
- 1.2 to 1.5 million employment opportunities would be created annually.
Society would not be heavily burdened by the forgiveness programme, with ‘insignificant inflationary pressure’ expected and a slight rise of between 0.65 and 0.75 percentage points in the budget deficit ratio of GDP (Fullwiler et al., 2018).
Furthermore, as the debt forgiveness scheme frees up disposable income for many households, this enables higher levels of consumption and investment and, consequently, the opening of more jobs. Aside from macroeconomic effects, the simulation of the student debt forgiveness scheme would also generate positive externalities. It predicted that falling student debt would enhance borrowers’ credit scores, resulting in more small businesses and new households as household and business expenditures increased. Most importantly, this will lessen vulnerability during economic downturns and encourage high enrolment and graduation rates, which will increase the number of skilled workers in the nation’s labour force (Fullwiler et al., 2018).
Although student debt forgiveness provides numerous benefits to the economy, it could bring several economic repercussions in the long run. Epstein (2021) believed substantial lending by the government to fund the initiative could increase the tuition fee. The competitive job market has pushed more students to continue their tertiary education to meet employers’ demands. As a result, the government must meet the increasing demand by lending money with little knowledge of the borrowers’ creditworthiness. This causes adverse selection, where an individual has complete information on the risks to maximise the outcome at the cost of another individual (Alston, 2014). Hence, the tuition fee will increase significantly, impacting students who do not take on student loans to fund their tertiary education.
More importantly, Epstein (2021) emphasises that educational resources should be distributed equally to maximise the economic value of education for society. Loans are created when borrowers’ earnings are enough to pay them back with interest, resulting in mutual payoffs for borrowers. Borrowers will no longer have an obligation to repay their student loans if their debts are forgiven, casting doubt on the borrowers’ ability to borrow in the first place. However, borrowers with fewer financial resources would be assisted by their families in deciding to take on student loans, as their families have more information on borrowers’ academic and career prospects. As a result, borrowers could make the right decision and avoid falling into a debt trap.
Furthermore, moral hazard is another prevalent issue for student debt forgiveness schemes. It emerges when customers decide to undertake more severe risks than their risk tolerance because the customers will not have to bear the implications of the risk, triggering a market failure. The risk transfer between customer and merchant has resulted in a customer being better off than a merchant due to incomplete information and major behavioural shifts among parties (Kuiper, 2016; Pettinger, 2019). Moral hazards can be prevented with strict and effective regulations, such as requiring a guarantor for loan issuances. Government-sponsored or debt-free educational institutions can also address moral hazard issues and resolve market inefficiency (Fullwiler et al., 2018).
Moral hazard issues start when the government needs to continuously increase revenue by raising taxes or issuing bonds that need interest payments to fund the scheme. During the COVID-19 pandemic, the government provided a few initiatives, such as loan repayment deferment, to all borrowers regardless of financial situation. The borrowers, who are impacted by the pandemic, would undoubtedly benefit from the initiatives. However, borrowers with sufficient financial resources would take this opportunity to avoid paying back their student debt obligations as usual, despite being capable of paying them back. Moreover, prospective borrowers could be incentivised to raise their borrowing by enrolling in an institution with higher tuition fees. They expect their loans to be forgiven eventually, resulting in unsustainable borrowing. The government’s debt accumulation level would rise rapidly and worsen the negative economic impacts towards the household, community, and macroeconomic variables. These will exacerbate the current business model to fund student loans because more liquidity is needed to generate more loans (Epstein, 2021).
Circling back to the theories and simulations explored in this section; it would be prudent to explore the consequences of similar ‘debt forgiveness programmes’ that have been undertaken throughout the globe. In the next section, we will explore the effects of a loan waiver scheme in India, and the loan waiver scheme underway by President Biden.
Loan Waiver Scheme in India
In India, not only are students saddled with debt, but so are small-scale farmers. High rural household debt among farmers has been a long-standing issue; the issue perpetuates as the earnings made by farmers are just enough to pay for the interest on their loans. Farmers are then left with low savings to sustain their living conditions, resulting in minimal investment and productivity in the agricultural sector. Hence, Gine and Kanz (2015) reported that the Indian government introduced the Agricultural Debt Waiver and Debt Relief Scheme for their farmers in 2008. The initiative assisted 60 million rural households by forgiving their debts entirely or partially with no strings attached, at the cost of $16 to $17 billion to the government in return for the potential of higher levels of agricultural productivity and investment.
The 2008 debt waiver scheme in India caused an insignificant improvement in investment, consumption, and wage hike. After the debt-forgiveness programme, the moral hazard between lenders and borrowers has become increasingly apparent. Financial institutions now lend with less vigilance, as the government ends up repaying these financial institutions on their forgiven loans. Although banks benefit from eliminating bad debts, more borrowers in high-default areas have stopped paying their debts (Gine and Kanz, 2015). Meanwhile, banks redistributed loans away from low-default areas, limiting access to loans for farmers in low-default areas to encourage more bad debts among farmers in high-default areas. As a result, the never-ending cycle of forgiving farmers’ debt continues, which caused India’s rural debt to grow significantly (Singh, 2019).
Sharma (2022) observed that the scheme had induced farmers to undertake even more significant risks by taking on more loans than they needed from financial institutions, leaving them with additional debts and increasing moral hazard exposure. The Hindu Bureau (2022) reported that farmers’ debt soared by 53 percent between 2016 and 2022, despite zero loan waivers being granted since 2016. Most importantly, it was used as a political game, with farmers voting for politicians who wish to reintroduce the same scheme, leaving the root cause of poor agricultural investment and productivity unaddressed. Singh (2019) also reported that similar schemes were offered in 11 states from 2014 to 2018, costing state governments over a trillion rupees. When the pandemic hit, farmers were unable to borrow money from banks. This resulted in them resorting to taking up loans at exorbitant interest rates from informal lenders (Anand and Jadhav, 2020).
Loan Waiver Scheme in the United States
According to the White House (2022), the COVID-19 pandemic has significantly brought financial challenges to American households, making some unable to accumulate wealth and meet student debt obligations. To reduce indebtedness to future generations and help borrowers from student debt trap, President Biden has introduced a targeted debt waiver and a student loan reform. The government will waive up to $20,000 for Pell Grant beneficiaries and up to $10,000 for non-Pell Grant beneficiaries if their annual income is lower than $125,000 and $250,000 for married persons. The government has also broadened eligibility for the Public Service Loan Forgiveness (PSLF), which forgives debt for more borrowers who work in public service.
In terms of student loan reform, the existing income-based repayment scheme, Revised Pay as You Earn (REPAYE), will face a major revamp. The revised REPAYE will limit the monthly instalments on undergraduate loans to 5 percent of borrowers’ disposable income. Borrowers who have committed to repaying for 10 years and have loan balances under $12,000 will have their loans forgiven. Moreover, the government will finance borrowers’ outstanding monthly interest, as long as the monthly instalments are paid. It will also raise the student loan repayment threshold to 225 percent of the federal poverty line, allowing low-income borrowers to start their repayments at a later time before reaching the threshold (Minsky, 2023; The White House, 2022).
Unfortunately, Biden’s initiative suffered severe financial and legal hurdles. The Office of Federal Student Aid (FSA), which handles the federal student loan portfolio, received a $2 billion budget in 2022. However, the FSA experienced a budget constraint in 2023 caused by political disagreements between congressional parties, pushing it to conduct significant cost-cutting measures (Turner, 2023). Moreover, Bloomberg Editors (2022) believed it caused lower expenditure on K-12 and early childhood education with significant moral hazard issues. Besides financial issues, it also faced lawsuits filed by conservative groups and Republicans who believed Biden’s initiative was detrimental, because Biden does not have the authority to carry out the expensive initiatives without congressional approval (Nova, 2023).
Given that President Biden’s initiative is currently facing financial and legal hurdles and the unintended consequences of the loan waiver schemes in India – it may be worth looking into other solutions. One potential idea could be ‘income-based repayment schemes.
Examples of Income-based Repayment Schemes
In late 2018, PTPTN proposed an income-based repayment scheme, which could benefit low and middle-income young borrowers who have recently joined the labour force. It also incentivises employers to assist employees in deducting their salaries for PTPTN loan repayment to get business tax rebates (Augustin, 2018). However, PTPTN’s proposed income-based repayment became controversial, because the student loan repayment threshold starts at RM1,000, sparking a huge commotion among borrowers (Bernama, 2018a). Although the threshold was revised to RM2,000 after the commotion, implementing the proposed income-based repayment was eventually delayed (Bernama, 2018b; Mat Rasid and Ishak, 2019). As the current time-based repayment scheme remains in place, Harun (2022) recently revealed that most borrowers would welcome an income-based repayment scheme. Borrowers believed that an income-based repayment scheme would alleviate their financial burden by allowing them to repay based on their net income a year after landing a job.
In 1989, the Australian government implemented an income-based student loan repayment, where borrowers must pay a progressive proportion of their income that exceeds a certain level. In other words, the higher the borrowers’ income, the larger the repayment share of their income. The government-backed Higher Education Loan Programme became an excellent example for other nations worldwide in managing student loans. It offers interest-free loans to borrowers, and their loan balance has taken the cost of living changes into account. Borrowers are not obligated to pay their debt until their income reaches a threshold, which is revised yearly. Repayment starts at one percent of the borrowers’ annual salary after it exceeds A$48,361 (RM143,883), and the highest rate is ten percent after it reaches A$141,848 (RM422,024) for the 2022-2023 income year (Australian Department of Education, 2023). The monthly instalment can be deducted from borrowers’ salaries, as the Australian Taxation Office is responsible for collecting the payments from borrowers (Congressional Budget Office, 2020; Taylor, 2020).
New Zealand’s income-based student loan repayment is similar to Australia’s because borrowers’ tax codes complement them to impose progressive tax rates. New Zealander borrowers must pay back 12 percent of every dollar they earn above the annual threshold of NZ$22,828 (RM63,244) for the tax year of 2024 (New Zealand Inland Revenue, 2022). Jaafar (2019) also claimed that New Zealand and Australia have strict enforcements imposed on their student loan repayments scheme, resulting in a high repayment rate of approximately 80 percent in each nation.
To summarise, Malaysia’s student debt crisis is a multifaceted socio-economic issue. If society believes that the value of tertiary education should not come with a price tag, the government would have to spend more money to make education free for all. Society must be aware that there is no such thing as a free lunch in this world. Hence, the student debt forgiveness scheme would not be the best mechanism to resolve Malaysia’s rising pile of student debt. It can expose the government to moral hazard and adverse selection issues and increase the debt burden to the nation and future generations. This was proven in countries such as the United States and India, where moral hazard issues arose from excessive debt forgiveness.
As of 30 September 2022, 3.7 million students have borrowed a total of RM67.69 billion to finance their tuition fees, highlighting PTPTN’s critical role in Malaysian tertiary education (PTPTN, 2022). Unfortunately, PTPTN’s business model is no longer sustainable and must be reformed, as it has put a strain on the government’s financial resources. PTPTN’s education loan offers an attractive interest rate of one percent, but it is unable to compensate for the borrowing cost of five percent. This created a huge interest rate gap, resulting in an RM50 billion debt to the government debt today (Basyir and Hakim, 2023; Jaafar, 2019). Instead of an unconditional debt-forgiveness programme, the Malaysian government could consider an income-based repayment scheme to strike a balance between fiscal sustainability and the maintenance of market power. It could help PTPTN restructure itself with a sustainable and cost-effective business model and ensure future generations have affordable access to tertiary education.
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Prepared by: Muhammad Hafizuddin Hakim
Reviewed by: Muhammad Bahari and Jennifer Ley
Edited by: Jennifer Ley