Asia’s student-debt time bomb
One of the most pressing issues facing the year-old government of Malaysia, led by Prime Minister Mahathir Mohamad, is the severely strained balance sheet it inherited. And part of its fiscal weakness is rooted in the 39 billion ringgit (US$9.5 billion) in outstanding debt owed to the National Higher Education Fund Corp (PTPTN).
Malaysia is not alone in this regard. Fuelled by rising economic prosperity and aspirations, the global higher-education sector boomed during the 1990s and 2000s. Many countries helped to fuel that explosion by liberalising higher education.
Fee-charging universities proliferated, to the point that the majority of university students in the Asia-Pacific region now attend private, not public, institutions. Globally, one-third of all tertiary-level students today are enrolled in private institutions.
Unsurprisingly, student-loan debt surged. Almost 12 years after the
1992 launch of its student-loan programme, New Zealand’s outstanding student debt stood at $7 billion. In the United States, that figure has reached
$1.5 trillion — triple its level in 2007.
Asian countries with high tertiary-education participation rates have proved particularly vulnerable to this trend. In South Korea, where 90% of young people pursue higher education — nearly 81% of which is private – education debt in 2013 grew by 12%, or twice the pace of consumer debt. In Japan — where 76% of highschool graduates pursue tertiary education, over 78% of them at private institutions — high tuition fees and loan-only financing exacerbate the debt burden.
But there is more to the story than privatisation and rising tuition fees. After all, the wealthy Scandinavian countries are also facing rising student-loan debts, despite offering free tuition. In Sweden, some 70% of students leave university with an average debt of about $20,000 (compared to $37,000 in the US).
In many Asian countries, the surge in university enrollment in the last few decades overwhelmed education systems, causing the quality of instruction to decline and leaving graduates poorly equipped for the labor market. Graduates’ employment prospects are further undermined in some countries by demographic shifts — specifically, growing working-age populations — and unfavourable economic conditions, which has led to jobless growth.
The result is a lot of low-quality employment, widespread unemployment, and many graduates who are struggling to repay their loans. India’s double-digit youth unemployment rate lies at the heart of its student-loan debt problem.
In Malaysia, approximately 28% of bachelor’s degree holders were unemployed in 2015. Many others had jobs that barely paid enough to survive: nearly 50% of working adults in Kuala Lumpur earn far below the central bank’s official living wage.
This has forced a large share of graduates to default not only on their student loans (51% of borrowers are not making the required payments), but also on other debts, including credit-card debt and personal loans. Debtors aged 25-44 constituted almost 60% of the bankruptcy cases reported from 2013 to August 2017.
The good news is that Malaysia’s government is taking action to address its student-loan problem. In its 2019 budget, the finance ministry introduced an income-contingent loan programme that closely resembles the incomebased payroll-deduction programmes in Australia and the United Kingdom.
Under the Malaysian system, borrowers earning more than 2,000 ringgit monthly can have between 2% and 15% of their salary automatically channeled toward loan payments. This is a promising short-term solution; but if wages remain depressed and living costs continue to rise, income deductions may not be economically feasible.
PTPTN will also allow borrowers earning less than 4,000 ringgit per month to defer repayment, and waive all remaining payments for borrowers over age 60 who earn less than 4,000 ringgit. Finally, a tax break will be introduced benefiting businesses that assist employees with student-loan repayment, though it is unclear how this will affect employers’ behaviour, given that up to 36% of new graduates in Malaysia quit their jobs within one year.
If Malaysia is to overcome its student-loan arrears, it will need to do more. For starters, it should change loan-disbursement criteria, so that a larger share of student costs is covered by grants and scholarships.
Malaysia should also emulate lessons from developed countries. In Germany, for example, parents are required to support their children financially, even during post-secondary education; in June 2016, only 18% of German students were managing student-loan debt.
It also helps that student loans are interest-free, borrowers get a fiveyear break before repayment begins, and high-performing students are rewarded with partial debt write-offs.
Given higher education’s critical role in supporting competitiveness and prosperity, policymakers — especially in transition economies like Malaysia, India, and China — should encourage participation. But they can hardly afford to allow student-loan debt to continue to snowball. After all, it was a student-loan crisis that triggered the massive protests that nearly brought down Chile’s government in 2011.
The goal must be to strike a balance between GDP and wage growth and growth in higher education. At the same time, governments must ensure that students are receiving high-quality education that meets the needs of today’s labour market and protect graduates against technological unemployment in the longer term. Creating a sufficient number of high-quality jobs for degree-holders is of course vital.
It is a tall order. But governments like Malaysia’s must fill it if they want to avoid even higher youth unemployment, a heavier burden of debt arrears, and the risk of political unrest.