In this post, Hedda associate Martina Vukasovic examines some of the puzzling features of the student loan system in the USA, highlighting the issues the system has been facing. Martina currently works at the Faculty of Education in Oslo where she is writing her doctoral dissertation on flagship universities in the Western Balkans.
On 12 May 2012 the New York Times website launched a series of articles, editorials, interactive graphs and video contributions called “Degrees of debt”, dedicated to “implications of soaring college costs and the indebtedness of students and their families” in the US. According to the series, nowadays about two thirds of bachelor level graduates borrow from public or private sources for their higher education, compared to approx. 45% in the early 90s. The average debt nationally is around 23,000 USD, but 10% of all borrowers owe more than 54,000 USD and 3% owe more than 100,000 USD.
The series includes portraits of 16 students from Ohio whose debt ranges from 15,000 to 100,000 USD, an article focusing on work as well as working conditions (salary, travel expenses, severance benefits) of the president of the Ohio State University whose graduates have on average more than 20,000 USD of debt, an editorial focusing on transparency of financial aid schemes, and an interactive graph focusing on average graduate debt and average cost of tuition and fees for a vast number of public and private higher education institutions across the US (for-profits and community colleges are not included, as well as a minor number of other institutions).
The latter is perhaps the feature most interesting to tinker with, especially since it offers a possibility to see changes from 2004 to 2010, select institutions based on their type (public or private), enrolment size, graduation rate, share of graduates with debt, and somewhat alien for a European – athletic conference. Through this tinkering, several interesting things come up:
- Not only has the average student debt increased from 2004 to 2010 (maximum average debt per institution, reached in 2009, was reported to be a bit less than 70,000 USD), but also the dispersion of institutions with respect to both annual costs and average student debt has increased. However, institutions seem to have become more different with respect to annual costs of tuition and fees than average graduate debt, i.e. the dispersion in fees and tuition increased more than dispersion in debt.
- High cost does not necessarily imply high graduate debt. The most costly institution in the sample (where annual tuition and fees is close to 42,000 USD) leaves its graduates with a bit more than 22,000 of debt, while the aforementioned maximum of almost 70,000 USD of average debt was recorded in an institution whose annual costs are a bit more than 20,000 USD.
- Institutions with higher average debt in general seem to have higher graduation rates. However, this is not a good argument for those in favour of increasing student debt through, for example, raising tuition fees, since the claim of causality between higher costs and higher effectiveness is spoiled by another piece of data: while the number of those borrowing and amounts borrowed increased from 1997 to 2003, so did the share of dropouts amongst the borrowers (from 23% to 30%).
- The graduates of 10 highest ranked institutions (according to ARWU 2012 ranking) in US are not amongst those with the highest average graduate debt (see table). Most of these institutions have approx. 50% of their graduates with some debt, while some have only 25% and with rather low average debt (at least compared to the others).
These “peculiarities” are first and foremost an indication of significant complexity with regards to funding of higher education in the US. This complexity is, amongst other, a result of (a) differences in terms of size of endowments for private institutions (e.g. Princeton University which has the lowest percentage of debt amongst the 10 highest ranked universities has reported an endowment of 17 billion USD in 2011, Harvard 32 billion USD, Stanford 16.5 billion USD), (b) state investment into public higher education (share of public funds per institution varies significantly between and within states), (c) availability of various forms of direct and indirect financial aid, from both public and private sources**, both need and merit based, and (d) outcomes of a complex process of student recruitment (or choice, depending on the perspective) in which affordability also plays an important role. When it comes to the latter, it is important to stress that there seems to be a substantial lack of transparency of financial aid information, making it extremely difficult for prospective students and their parents to successfully estimate how much they are likely to be in debt upon completion. This has led to a high level initiative spearheaded by US Vice President Joe Biden and a number of colleges and universities (including SUNY, U of Texas and U of North Carolina at Chapel Hill) to create first of all “user-friendly financial aid letters” as of 2013/2014, but also a national scorecard  rating colleges on value and affordability. Although this is seen as ensuring “basic transparency” (as Secretary of Education Arne Duncan put it), there is also an expectation that “colleges are unlikely to embrace this forthright approach to pricing unless the federal government makes it mandatory”.
The “peculiarities” continue in terms of student loans being a rather profitable business. They are generating profits for all involved (apart from students and their families) thanks to high interest and lifting of bankruptcy protection. It is also interesting to see a rather developed student loan industry, with a number of publicly traded corporations (such as Sallie Mae and Nelnet) some of which were initially non-profit agencies but turned for-profit. Some of these companies have been at the centre of the so-called “9.5 scandal”, which started when a former researcher of the Department of Education Jon Oberg in 2003 (18 months before his retirement) uncovered that a total of nine student loan companies were systematically overcharging the federal government for 9.5% of subsidies for low-cost student loans by inflating the volume of loans eligible for the subsidy. It is estimated that the nine companies overcharged the US government for a total of 1 billion USD.  It apparently took the Department of Education four years to react, with much of the time spent, as it seems, in discussing whether a congressional action is necessary or the Department can decide to stop the subsidies on its own. It took additional three years for the cases to get to the courts, where most of them ended in settlements in which the companies did not admit any wrongdoing, were expected to pay fines much lower than the amount they supposedly overcharged (in the case of Nelnet who supposedly overcharged more than 400 million USD, the settlement was 55 million) and will not be in the future eligible for the same subsidy.
In sum, the issue of increasing student debt goes beyond the discussion of why costs of higher education have increased 4 to 6 times more than the consumer price index from late 70s until 2010**. It also touches upon the questions of general affordability and accessibility of higher education, but also of whether it actually pays off to get higher education under such conditions if, in particular during an economic downturn, one is forced to work in several low-skilled jobs to pay off one’s debt. Finally, it also brings back the issue of steering mechanisms in higher education back on the table. If student debt and expanding student loan industry are perceived to be policy problems – and they are, at least by the current administration in Washington, the borrowers themselves (naturally) but also some of the higher education institutions – whose task is it to tackle the problem and with what policy instruments?
**  For an excellent overview of different types of aid see Franke, R. and W. Purdy (in press). Student Financial Aid in the United States: Instruments, effects and policy implications. In Vukasović et al. (Eds.) Effects of Higher Education Reforms: Focus on change dynamics. Sense Publishers

By John Morgan. The new student loans system designed by the government to support higher tuition fees is “unsustainable in the long term”, according to a survey of senior figures in higher education conducted by Barclays. The poll, of 46 higher education professionals, was carried out at a “Future of Higher Education” debate hosted by the bank, which brought together experts from finance, government and the sector itself.
Barclays said the survey found that 76 per cent of those questioned “did not believe the new system of repayable grants was sustainable”. And “just 15 per cent were confident it could be maintained”. The rest were unsure. The government has said it that plans to explore the possibility of selling the student loan book to private sector buyers.
Chris Hearn, head of education at Barclays Corporate, said: “There will become a point when the size of the student finance book will need to be addressed, probably within the next five to 10 years, but I’m confident a solution will be found.”
The Barclays survey follows an interview by Mr Hearn with Times Higher Education, in which he said that the new undergraduate finance scheme “is attracting interest, and proper interest, this time – rather than the old scheme, which was just effectively [keeping pace with] inflation – it may be that there are elements of it that could be sold”.
Survey respondents agreed that the new undergraduate loans system was confusing – 84 per cent said that prospective undergraduates and their parents had not yet grasped how student finance works and what it will mean for them financially. On the impact of the new system on postgraduate students, more than two-thirds (67 per cent) of those higher education professionals surveyed said they expected the number of postgraduates at their institution to fall. A further 22 per cent said that they did not expect numbers to be affected, while the remaining 11 per cent were not sure. Mr Hearn has also told THE that Barclays was exploring with the government the possibility of providing finance for postgraduates.

By Allan Pall*. The European Commission recently published an agenda for the modernisation of Europe's higher education systems, which is a revamp of its 2006 plan. It is important to remember that the commission exists to support national higher education efforts, but its role is crucial, particularly with regard to funding.
The commission is seeking to increase the budget share from the central European Union financial framework from 2014 onwards by more than 70%. That is money invested directly in more student mobility grants, more cooperation support and more action on policy issues. But more importantly, while the overall EU budget is set to remain approximately the same size, the big increase in higher education investment sends an important message.
If we consider that the potential of our universities is still hidden to a degree and that we need to do something to release it, then the announcement is a clear communication that greater investment is needed. The commission does not put it so bluntly, but its actions hopefully speak for themselves. We must bear in mind that traditionally, spending on education has been tiny compared to the overall size of the EU budget - the sum proposed represents only around EUR15 billion (US$21.3 billion) of an overall EUR1 trillion budget. However, universities will also benefit from the research and innovation budget and cohesion funds.
Interestingly, the announcement focuses on two crucial issues that are of great importance to the success of higher education and the role it can play in personal, societal and economic development. Namely, that we need to do more to unleash the potential of every individual by widening participation, and that we need an education system that is more attuned to the needs of society and the labour market. This means that teaching and learning needs to become more student-centred, focusing on building competence and keeping citizens active for longer. Europe has long decided that encouraging greater mobility of students and staff plays a key role in bringing down barriers to learning and freedom.
The commission has been at the forefront of promoting mobility, through specific policies and initiatives such as the Erasmus programme, which has sent more than two million students for a period of study in another country in Europe since it was inaugurated. The Erasmus generation is ultimately European, but also more adaptable to social and economic change. Being able to study in different countries enables students to become better in transversal skills, which have a great long-term value.
Erasmus has been based on providing grants and it has also been tuition-free - students are not required to pay the fees of the institutions at which they spend time abroad. The commission now seems eager to try something new - awarding a loan guarantee of EUR100 million a year to help masters students fund full degree study abroad. In the past, mobility has been limited for such students as most financial help with fees has been for national-level study.
Thus a student from a lower socio-economic background would face an uphill struggle to find the funds to do a full degree in another country in Europe. The commission therefore has a good target audience and it knows what that audience needs, following a feasibility study that it carried out. However, this new policy also sends another signal to governments - invest in higher education, but do it through loans so that students also contribute to the costs.
Loans are nothing new and many governments have put them in place, often with the endorsement of students, especially when schemes are designed to have so-called progressive elements like income contingent repayments, grace periods and subsidised interest rates. All of these have also been proposed by the feasibility study, which also envisages a new EU institution that will manage a portfolio of EUR60 billion, which in the current political climate appears unimaginable. The plan is not a concrete proposal, but an idea for guaranteeing such loans through private banks (those that the governments still keep on bailing out). Thus we can only guess what the real conditions of the loans would be for students. No current study, including the feasibility study, has examined the actual attractiveness of such loans.
Secondly, the commission seems to be expecting everybody to immediately jump at the opportunity to endorse its idea even though there is not much detail about it and there has been no meaningful democratic dialogue with member states and citizens.
Thirdly, guaranteeing such loans needs to give students more than what member states are doing already for students, and must not act as a disincentive for governments making their own funds available for mobile study, something that has been a key promise of Bologna process ministers since 1999.
Fourthly, given that the scheme involves private banks, it is doubtful whether these could offer subsidies or tie repayments to students' later earnings. Such a scheme would not take into account individual financial gains or losses since higher education will not yield huge fortunes to graduates by itself. Thus the scheme actually doesn't appear to provide many options for increasing social mobility, as the loans are likely to be expensive and poorer students are more debt-averse.
Finally, one wonders if this scheme represents a change in the European Commission's approach to funding streams. The commission has stated publicly that it still considers grants to be important and that loans are simply an additional means of funding students. But we surely need to admit that rising youth unemployment and an increasing graduate debt burden might become an explosive mix, leading to greater social divisions between young and old.
What goes through the heads of this generation? How will such schemes affect today's and tomorrow's indebted generation of graduates? How will they affect graduates' plans to become parents and build capital for the future, for pension and increasing healthcare costs?
Of course, some economists do not consider this a long-term problem, but the perception that it might be is there and, as history has shown, perceptions are sometimes enough to provoke a reaction. *Allan Pall is chairperson of the European Students' Union.

By Bruno Dente and Nadia Piraino*. In the latter part of last century, student loans policies became a central issue in higher education strategies in several countries. On the one hand, the explosion of university enrolments coupled with fiscal pressure, quite naturally pushed towards the participation of graduates in education costs. On the other hand, the debate in higher education policy had been characterised by growing attention to a cost-sharing approach.
According to this theory, the cost of higher education should be shared by four principal parties: government, or taxpayers; parents; students; and/or individual or institutional donors. This means that, although the government recognises the social benefits of higher education (in terms of economic growth, less criminality, more social cohesion, transmission of values), parents and students should also be involved in the funding process, given the high private returns in terms of better status and higher lifetime income.
The strength of the student loans model vis-à-vis other forms of financial support is represented by its ability to guarantee both efficiency and equity. The implementation of student loans models around the world provides a lot of evidence to support this, but the measurement of their impact has usually been based on case studies, often focusing only on some aspects (equity, efficiency etc) of the policy. There are no theoretical and methodological works able to design comparative evaluations. Our research attempts to plug this gap.
Firstly, we sought to define the minimal requirements that should be met in order to qualify a loan scheme as a public policy. Our postulate is that the main point is the existence of a credit guarantee provided by the state. Student loans become a public programme if, and only if, the guarantee is provided by a third (public) party. In other words there is state intervention aimed at solving a market failure: the inability of the financial system to lend money to a class of potential borrowers because they lack adequate collateral.
Given this preliminary assumption, we attempted to identify the problems that the public policy should solve. They are:
(a) Equity: ensuring access to higher education by students from a disadvantaged background. In many countries the low percentage of poor students is a social problem. The introduction of a student loans scheme targeted at poor students could increase their educational participation, favouring social mobility.
(b) Finance: increasing higher education funding. The intervention of the state represents an answer to the problem of under-financed public universities. The participation of the student in meeting the cost of his/her education allows for an increase in tuition fees and therefore allows for the maintenance of high standards of teaching. The negative impact of tuition fees on higher education enrolments can be at least partly offset by a loan scheme.
(c) Labour market: promoting specific professional skills. The loan scheme can support the development of specific fields of study, depending on manpower priorities.
(d) Society: securing financial student autonomy. The introduction of a loan programme could grant a mutual independence both to the student and to his/her family because of the absence of economic constraints.
The next step was to construct different models of student loans programmes. A public policy can fail either because of problems in the implementation phase (lack of resources, changes in the environment etc), or because it was badly designed to start with.
Before entering the actual measurement of the policy outcome, therefore, it is necessary to understand if the programme was actually able to meet its goals, that is, if the different elements were combined in an appropriate way. There is no plausible reason why the fact that the repayments are collected by a public agency or a commercial bank should increase or decrease the effectiveness of the policy, even if it can affect its efficiency.
The main characteristics of student loans programmes are their repayment mechanism, interest rates charged and the total amount of the loan. A fourth and a fifth element can be added: the eligibility rules, and the fact that the programme is designed as an open-ended entitlement or as a fixed amount subsidy programme. As far as repayment mechanisms are concerned, student loans schemes can be mortgage-type (or conventional) or income-contingent. The first one foresees a repayment scheme in fixed installments for a fixed period of time. The second one is based on repayments as a percentage of a borrower's income.
The second important element is represented by the interest rate, that is, by the existence of an actual subsidy (different from the mere existence of a state guarantee) or by the fact that the normal commercial rate is applied.
The third element is represented by the amount of the loan. Here the two polar alternatives are on the one hand the fact that the loan scheme covers only the tuition fees or, on the other hand, that it includes actual living costs.
The fourth element concerns the eligibility rules. This is a crucial element in the loan design. Here the two polar situations are one in which all prospective students can apply and another in which only people with specific characteristics (family income or academic track record) can become beneficiaries.
The fifth and final element is represented by the nature of the programme: the fact that it is an open-ended entitlement (all the potentially eligible beneficiaries can apply) or that is a fixed amount subsidy (a given amount of resources is available, rationed on the basis of the 'first come, first served' principle or any other criterion).
Taking these factors into account, we looked at four idealised models: namely, increasing equity, promoting students' autonomy, increasing universities' funding and adjusting to the needs of the labour market. It is possible to assess if the design of a scheme is coherent and able to maximise the expected outcome. Some of the schemes are more 'generous' than what they should be in theory. If this is a temporary measure in order to 'sell' the programmes to the target groups, then it is understandable and appropriate. But if these features persist over time, then the social efficiency of the policy will be weakened as the state will be investing more than it seems necessary.
Second, this framework can be used to find out the real goals of a loan policy, without the need to make reference to political rhetoric. Third, the typology proposed allows the development of a system of effectiveness indicators and therefore of a correct evaluation. Once a coherent design has been found in a specific country, by assessing its effectiveness it is possible to ascertain if its failure or partial success is due to the implementation structure or the policy design. Finally, using our framework can contribute to open the debate about the possibility (and, of course, desirability) of a universal student loan scheme.
For instance, if we embrace the cost-sharing approach, according to which the increase in students' contribution to higher education costs is superior both in efficiency and in equity terms, the loan policy could try to internalise all the possible goals mentioned above. By granting all students the right to have a loan it could pursue a universal approach; by including in the total amount both the tuition fees (based on the real cost of the study) and living costs it could improve students' autonomy; by providing subsidised interest rates, and introducing an income-contingent repayment mechanism, both conditional upon certain characteristics of the applicant and-or of his or her field of study, it could take into consideration social goals and the need to correct the failures of the labour market.
Of course, this is merely a theoretical exercise, furthermore one based on premises that are far from being widely shared. But it gives an idea, we hope, of the usefulness, also for policy design, of an agreed conceptual framework in order to systematise our knowledge of a given phenomenon, in our case student loan policy.
* Bruno Dente and Nadia Piraino are at the Centre for Administration and Public Policies, Politecnico di Milano in Milan, Italy. This is an edited version of an article, "Models for Determining the Efficiency of Student Loan Policies", in the current edition of the Journal of Higher Education Policy and Management.