Student loan mechanism


  • Education
  • Sunday, 05 May 2019

Prof Chapman (right) and Prof Dearden say Income Contingent Loans is more effective than time-based repayment plans.

IS it possible to make repayment of student loans such as the National Higher Education Fund Corporation (PTPTN) loans less daunting?

Income Contingent Loan (ICL) Repayment experts Prof Bruce Chapman and Prof Lorraine Dearden, who have nearly 45 years of experience in the field combined, believe it can be done by implementing the ICL system, which requires deduction from borrowers’ salaries only if it reaches a certain threshold.

“An ICL is a student loan mechanism whereby people can pay for their tuition or repay living expenses in a loan situation in which they only pay when they reach a certain level of income (depending on each country). If they don’t receive income, they do not pay,” said Prof Chapman during an interview.

He added that a majority of economists agree that ICLs are preferable for borrowers because it offers insurance against adverse circumstances in the process of repayment.

“If the borrowers find themselves in a bad situation, they don’t have to be anxious about repayment or worry about the labour market causing unemployment for them because they are protected.

“But that is not the case for time-based loans, which although not as efficient, remains as the most common repayment system,” he explained.

Prof Dearden concurred, saying that by implementing ICL, the loans would not be defaulted.

“If it is implemented, officials do not need to chase students for repayment as it is an efficient process like how income tax is collected. Unlike a car or house loan which requires one to repay the loan in a short amount of time, you’ve got your whole life to pay your student loan – which is an investment for your future,” she explained, adding that people don’t have to change life decisions based on their student loans.

“You will never face financial burden with ICL because the amount you have to pay back is capped, it can never be above the maximum repayment rate,” she said.

Prof Chapman advised that should a country want to implement an ICL, it should learn from the challenges other countries have been through and the steps taken to overcome the issues.

Several countries including Australia, New Zealand, the United Kingdom, Hungary, Thailand, Netherlands, South Korea, Japan and Brazil have implemented ICL.

PTPTN deputy chief executive (Policy and Operation) Mastura Mohd Khalid said the corporation is conducting studies on how best to implement the ICL system for PTPTN borrowers.

“It is a possibility this method could be used to collect what borrowers owe the corporation. Studies are being conducted and we will make an announcement once we are ready,” she said.


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