The report finds that Chile’s proposed New Public Financing Instrument for Higher Education (FES) could significantly ease student debt burdens and improve gender and income equity in loan repayment. The new system would also strengthen the long-term sustainability of public spending on higher education financing.
The FES is a proposed government-backed income-contingent graduate contribution system that involves no student debt or default. The proposed system draws on and builds on successful income-contingent loan (ICL) schemes that have been running in Australia, the UK, and New Zealand for almost 40 years, and is currently being debated in Chilean parliament.
If approved, FES would replace the bank-based government and university guaranteed loan systems (CAE and FSCU) currently operating in Chile, which have been criticised as being costly and inefficient.
In the report, the researchers detail their findings on the implications of the new system for students, higher education providers and taxpayers in Chile. They highlight several key benefits:
Financial sustainability: under the proposed parameters, FES is expected to recover between 94-105% of public investment over the long-term, assuming a real wage growth of 1-2%.
Automatic protections: repayments would be deducted by employers and paid directly to the lender, stopping during periods of low earnings below a certain threshold, or time spent outside of the formal labour market.
Time limits: student loans would only be repaid for a set amount of time based on the number of semesters in which a loan is drawn, limited to a maximum of 20 years.
Repayment caps: the total amount repaid could be lowered from 3.5 times the initial amount loaned by the government, to between 1.5 and 2.5 times the amount, with some small changes, lowering the effective interest rates for the highest earning graduates without a significant loss of government revenue.
Equitable: high earners contribute more over time, while lower earners pay less overall, meaning that those who benefitted the most from higher education give more back (see Figure 1).
The work was co-funded by UCL and the Undersecretary of Higher Education of Chile under a UCL Knowledge Exchange initiative to create a new, more efficient and financially sustainable publicly funded student funding instrument in Chile, and the UCL Public Policy Quality-Related Policy Support Fund.
Authored by Professor Lorraine Dearden, Natalia Valdes Aspillaga (both UCL Institute of Social Research) and UCL alumnus Héctor Ríos-Jara (Universidad Central de Chile), the report used detailed Chilean administrative data and state-of-the-art simulation methods to test the model.
It builds on decades-long work that the lead auth, Professor Dearden (Chair of Economics and Social Statistics), has conducted to provide foundations for efficient and more equitable student loan system reforms across the US, South America, and Asia. She said:
“It has been an honour to be involved in this project with Chilean colleagues to develop a microsimulation model that can estimate the fiscal and distributional implications of the proposed FES reform and compare it with more traditional ICL schemes being put forward by other groups in Chile.
“The FES scheme is an interesting innovation for income-based loan schemes, and I think it could form the template for other countries considering student loan reform in the coming years.”
Links
View the report executive summary (English)
View the report executive summary (Spanish)
Images
Top: Left to right: Héctor Ríos-Jara, Víctor Orellana Calderón (Undersecretary of Higher Education of Chile), Professor Lorraine Dearden, Nicolás Cataldo Astorga (Minister of Education of Chile), and Natalia Valdes.
Bottom: Average repayment by loan and FES holders life time earning ventiles – Figure 1 from the report.