Before he even took office, President Joe Biden faced calls from student loan debtors and political colleagues alike to cancel – in full or in part – U.S. $1.7 trillion in student loan debt. This pressure is the culmination of years of effort. Almost a decade ago, the Occupy Student Debt Campaign, a student debt abolition movement, an offshoot of the Occupy Wall Street protests, announced as one of its goals the elimination of current student debt through a single act of relief. It sounded amazing at the time.
Source: https://www.fairobserver.com
But less than a decade later, the ever-growing student loan bill became an issue in the 2020 Democratic presidential primary. While Sen. Bernie Sanders argued the entire sum should be forgiven, the Biden campaign ultimately floated the idea of making four-year public institutions free for any family earning under $125,000 annually, as well as forgiving up to $10,000 in federal student loan debt. In the last session of Congress, now Senate Majority Leader Chuck Schumer, Senator Elizabeth Warren, and Representative Ayanna Pressley introduced a resolution to forgive up to $50,000 in federal student loan debt. They reintroduced it once again within weeks of Biden’s inauguration.
Originally, government and private banking made student loans available to increase enrollment and access to education. But over time, the ballooning cost of university and vocational training took on a life of its own. For the people who owe money, it impacts everything from career choices to marriage rates. People with student debt have fewer retirement savings at the age of 30 and are less likely to own a home by their mid-30s.
Students, it turned out, were not price-sensitive when it came to using borrowed funds. Colleges quickly realised they could raise prices without affecting their enrolment. For example, in 1976, the average cost among all U.S. institutions when including room and board was $2,275, but that price more than doubled a decade later to $5,206. This price accounts for inflation. Many turned to loans to paper over the gap. Over time, students began to face higher debt loads and a harder time paying off the loans.
In Malaysia, PTPTN is sitting on a RM40 billion of government-guaranteed debt, which is expected to almost double to RM76 billion in 20 years. For perspective, this is more than the amount involved in the 1MDB scandal. The emphasis on the repayment problem has detracted attention from the more serious issue of the sustainability of the fund. The current model is not sustainable, as it borrows at 5% and lends at only 1%, with the difference being subsidised by the government. This is why it is now time for an overhaul of the fund’s operating model. The scale of the repayment problem is huge, with more than half of borrowers defaulting. The current loan repayment percentage ratio is 49:51, with 49% actively paying back their debt while 51% are not.
From RM56 billion that PTPTN has disbursed to date, only 32.5% has been repaid in full. The gap between the cumulative amount of loans disbursed and that have been repaid continues to widen every year.
Against that backdrop, the number of students requiring loans from PTPTN is also on an upward trend and is expected to grow from 180,000 to 250,000 by 2040, in line with the enrolment growth projected in the Higher Education Blueprint.
The only way this can work is if the loan sum to be repaid is paid partially by Government coffers from a new tax on financial transactions (This is not a new idea but something Elizabeth Warren suggested for the U.S. case). A financial transaction tax (FTT) is on buying/selling stock, bond, derivatives or options. Something like 2 sen for every RM1,000 traded. Will the Finance Minister be brave enough to do this?
References:
Student loans: the origins of a racket, Devan Lindey, Feb 18, 2021 (https://publicseminar.org)
Special Report: PTPTN in search of a sustainable model, Syahirah Syed Jaafar, The Edge Malaysia, Dec 7, 2019
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