IOE - Faculty of Education and Society


A global look at student loans

Is one type of loan better than the other?

Graduation celebrations on UCL campus (Photo: Mary Hinkley for UCL Digital Media)

21 October 2020

By Catherine Farmer.

Tens of millions of recent graduates are expected to be looking for work in a world with scarce employment opportunities as a result of the global pandemic. Higher education is a fundamental building block to ensure the maintenance and growth of skilled labour, and it is essential for a country’s economic prosperity and growth.

Education is part of government strategy to improve equality of opportunity and deliver good outcomes, especially for those from disadvantaged backgrounds. Public sector finance is key to unlocking the poverty trap which has affected several generations, and the delivery of higher-level skills associated with higher education is made possible through student loans.

A short history of student loans

Bologna was the first official university to provide loans to some students in the late eleventh century. The first student loans system was formalised in 1240 by the Bishop of Lincoln at the University of Oxford.

The Colombian government began the world’s first national student loan scheme in 1951 and is still in place today. In Australia, loans were re-introduced in 1989, having been abolished in 1974, and used to finance a major expansion of university places. In England, tuition fees were £1,000 for every full-time student year for some undergraduate students in 1998. This was increased to £3,000 in 2006 for full-time undergraduates, to £9,000 in 2012 and currently stands at £9,250.

Today, there are two approaches to student loans adopted by different countries:

  • Time-based repayment loans (TRBL) - a series of repayments over a given period of time, for example, ten years 
  • Income contingent loans (ICL) - repayments dependent on the borrower’s (the graduate) future income.

The fairness and effectiveness of student loans

There is no such thing as ‘free’ higher education. Countries, such as Germany, Denmark and Sweden, do not charge tuition fees and university is ‘free’ to students. The cost is borne by taxpayers. The abolition of student loans has featured in election campaigns in both the UK and New Zealand. In New York state, fees were removed for the majority of college students. But, as economists like IOE’s Professor Lorraine Dearden point out, ‘free’ higher education is regressive, as non-graduate taxpayers who finance it are financially disadvantaged over their lifetime compared with graduates.  

The differences between student loan types

Time-based repayment loans (TRBL)Income contingent loans (ICL)
No security if graduate experiences hard-times.No loan repayment if the debtor (the graduate) experiences low personal income e.g. unemployment, poorly paid job, caring role.
If the loans are defaulted (non-repayment) this damages the graduate's credit reputation and severely limits the individual’s access to normal commercial loans e.g. buying a house.Provides insurance to borrowers from repayment hardship and default. 
High non-repayment rates for graduate borrowers, causing major expenditure for governments. 
Repayment burden effect on poorer earning graduates and women. 

In England, the Student Loan Company have advised graduates that if you stop working, or your income drops below a certain threshold, your repayments will stop too.

What does the evidence say about ICLs in comparison to TRBLs?

There is general agreement that ICLs are preferred to TRBLs. In many countries, governments are seeking analysis and guidance from experts familiar with the implementation and design of ICL systems, especially over the past twenty years. There is now a powerful case to move towards ICL and away from TRBL. The reasons for the loan preference include that, for countries which have introduced ICL:

  • higher education enrolments expanded rapidly after the introduction of loan reform
  • access of disadvantaged to higher education has expanded
  • there have been no issues with default and credit reputation loss, nor repayment hardships, as these are not allowed under ICL rules
  • deducting loan repayments by employers has been cost-effective as it doesn’t require public sector administration.

Those countries who still have TRBLs have experienced:

  • very high levels of default (rarely below 20% and often in excess of 50/60%) which leaves them with a bad credit reputation
  • considerable wastage of government revenue due to the non-collection and expense of chasing of debt
  • low levels of higher education enrolment expansion due to the costs and non-repayment of loans.

Student Loans

Why are countries not abandoning TRBLs and adopting ICLs?

Understanding around the adoption of ICLs are possibly inaccurate and misunderstood. Governments need to accurately assess the implications of change especially as ICL systems may seem unfamiliar or irrelevant and hard to comprehend where TRBL systems are only known. The introduction of ICL requires a detailed understanding of how a country’s institutions and cultural practices work, how their social security and tax systems are set up and what the graduate job market looks like.

In developing countries, there is apprehension and caution about adopting ICLs. This is because of collection concerns, as there is often a large informal workforce and individual future income is in doubt as both determine ICL revenue streams. 

The implications of COVID-19 on graduates

Professor Dearden considers those graduates who have TRBLs will now be experiencing major anxiety associated with the looming high prospect of both loan repayment difficulties and default on their debt. The COVID-19 pandemic can be compared with the impact of a recession across countries and labour markets are already showing signs of devastation. Those ICL graduates facing hardship will not have the concern of loan repayments or default.

The need to move away from TRBL to ICL is overwhelming and research evidence is essential to help explain why.