PTPTN NEEDS BETTER BUSINESS MODEL
WE have heard a lot about the problems with the National Higher Education Fund Corporation (PTPTN) loans and the moral arguments for repayment, but the real issue is in the use of loans to fund higher education rather than the morality of repaying the loans.
The basic problem with PTPTN is in the numbers. Currently, only around 55 per cent of PTPTN borrowers are repaying.
According to the Department of Statistics, the median salary of graduates last year was around RM3,400 per month.
The average salary was around RM4,320 per month last year, which is slightly above the proposed threshold for repayment set by the new government, which was based on the average for 2016 of RM4,00 per month.
This means that more than half of the borrowers would not have to repay.
If the system is unstable with 55 per cent paying, it will be even more unstable if only 45 per cent need to pay.
The repayment rate will have fallen by 10 per cent even if we assume that all of these people will comply.
If the repayment rate among this group is low, say only half repaying, then it may fall below 45 per cent to as low as 25 per cent.
With that rate of repayment, the system will collapse.
The government is already paying around RM2 billion per year to plug the repayment gap which will get worse, and less money will be available for future students.
In 2014, the previous government even announced a reduction in the loan amounts of five per cent for those in the public sector and 15 per cent for those in the private sector.
So, how can the government solve this? One way is to monetise this debt.
Put simply, monetisation is the process through which the government turns debt into money which is then released into the economy through financial institutions.
In the case of PTPTN, the total outstanding debt is around RM39 billion. To monetise this amount, Bank Negara Malaysia would simply take over the responsibility to pay the debt and could, for example, turn it into 10 repayments of RM4 billion per year over a decade.
BNM would then print RM4 billion each year to pay off the debt.
Since the economy is valued at around RM1.4 trillion, this amount is trivial.
There is no inflationary effect, the value of the ringgit is not diminished and there are few, if any repercussions, in the financial system.
Problem solved and the Pakatan Harapan (PH) manifesto commitment is intact — those earning below RM4,000 would not pay and neither would those earning above RM4,000.
Of course, this would leave the issue of how to pay for future education. This is where system reform comes in.
Currently, the government spends just under RM14 billion per year on higher education, almost all of it on public universities.
The revenue of private universities is around RM6 billion.
Taken together, this RM20 billion is around 1.4 per cent of national income which is slightly below but broadly in line with the amount spent by Organisation for Economic Co-operation and Development governments on higher education.
This is not a large amount in the big scheme of things and the government can easily recover this from taxes.
In particular, it could use a graduate tax for those earning more than RM4,000 per month to recover the costs through the tax system and so reduce the losses due to non-payment.
This would also have the benefit of providing stable income to the private universities, more than half of which are technically insolvent. Again, problem solved.
A more radical alternative is to reform PTPTN from a source of income for universities into a source of investment in universities — a sort of national higher education investment fund.
Currently, PTPTN is provided as loans to students who use it to pay fees which are a source of income for universities.
This accounts for around 40 per cent of the income in the private sector and 10 per cent in the public sector.
If this was changed to investment funding, PTPTN could own shares in the universities allowing them to turnaround the very poor management, particularly in many private institutions.
PTPTN would benefit from dividends to help repay the costs and when the turnaround is complete, the investment can be recovered through the sale of the shares to replenish the fund.
This is a significant change in the role of PTPTN but provides a better business model in the longer term and an avenue for PTPTN to be an active player in the improvement of higher education quality.
We are told to expect an announcement soon on how PTPTN will deliver the PH manifesto pledge to waive payments for low earners.
It will be interesting to see whether there is a radical reform of PTPTN or whether higher earners will be hit with sterner repayment rules.
If the second option is chosen the basic numbers show that chasing non-payers will be the bane of the Education Ministry for some time to come.