LETTERS: I refer to the article, "Incorporate banking system to assist in educational loans" (NST, June 22), by Tan Sri Dr Sulaiman Mahbob, chairman of the Malaysian Institute of Economic Research.
The Centre recently concluded a four-part research series on student debt in Malaysia and would like to extend the conversation on student loan reforms by responding to Sulaiman's proposal.
While we agree with him that students of various ethnic groups and social status have benefited from student loans, we take issue with the suggestion to involve the banking system in designing financial assistance for students.
There are educational loans offered by banks, but greater reliance on banks is not the path that should be taken to reform higher education financing.
There are two likely consequences in incorporating the banking system into the student loan reform agenda:
FIRST, banks will charge higher interest rates on educational loans to be profitable, and second, the loan recollection mechanism will be punitive.
Here is an example from a local bank's educational loan: a student (or his parents) with an income greater than RM 2,000 a month may be eligible to borrow up to RM1 million.
The greater the amount borrowed, the higher the collateral needed. What happens if a B40 household borrower defaults?
The bank would then have the right to seize his collateral, with severe repercussions on his family's financial wellbeing since the parents would probably act as the guarantor.
We estimate that, on average, students enrolling in a local public university or a local private university will accumulate student debt of RM26,600 and RM56,120 respectively for a four-year degree.
Our survey, as well as data from the National Higher Education Fund Corporation (PTPTN) and Department of Statistics, show that many borrowers do not have sufficient income to make steady repayments.
Here is how dire the situation is: the majority of new degree graduates earned between RM1,001 and RM1,500 in 2020, according to data.
Almost 60 per cent of graduates were or remained unemployed a year after graduation in 2018 (according to a graduate tracer study data), and more than one-third of borrowers surveyed by PTPTN in 2019 earned below RM2,000 a month.
The other problem is the significant interest rate gap between PTPTN's borrowings and its lending, which makes for an unsustainable model.
PTPTN has acknowledged this fact with chairman Datuk Wan Saiful Wan Jan writing: "PTPTN borrows from the financial market at, on average, four to five per cent interest rate, while it charges borrowers just one per cent.
"The difference has been compounding year on year for 20 years, contributing to PTPTN's mountain of debt."
We concur with Dr Sulaiman and Wan Saiful that the loan system is unsustainable. But getting banks more involved does not resolve outstanding issues.
We propose that the government and stakeholders consider a multi-pronged approach that is more sustainable yet sensitive to the socioeconomic context.
They include providing direct subsidy to B40 students, creating lifelong education savings accounts that are set up automatically for newborns, implementing income-based repayment with appropriate threshold and tiering, and shifting enrolment to technical and vocational education and training (TVET) and microcredentials.
These policy recommendations are discussed in detail in our Indebted Generation research series, accessible at www.centre.my.
OOI KOK HIN
The Centre think tank
Kuala Lumpur
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times
The views expressed in this article are the author's own and do not necessarily reflect those of the New Straits Times