Chapter 1
Introduction:
Issues in and Analytical Frameworks for Tuition and Student
Financial Aid Policies:
Lessons for Japanese Higher Education

Masayuki Kobayashi
Center for Research and Development for Higher Education
The University of Tokyo

5

Chapter 1 Introduction:
Issues in and Analytical Frameworks for Tuition and Student
Financial Aid Policies:
Lessons for Japanese Higher Education

Masayuki Kobayashi

1.

IssuesIn this report, we will discuss six issues regarding student financial aid policies in higher
education. It is very important that we discuss these issues in a way that recognizes themas mutually being related; tuition fees and student financial aid, in particular, should beconsidered as a set. The analytical framework and main issues are as follows:(1) Cost-sharing in higher education(2) Improving access to higher education and affordability(3) Rising costs of higher education(4) Borrowers’ loan burden and loan aversion problem(5) The evaluation of student loan repayment schemes(6) The information gap and financial literacy
Each paper deals with these issues, and provides lessons for Japan. I will briefly
outline the main points of the six issues while explaining the situation of higher educationin Japan.

2.

Cost-sharing in higher education
The first issue is cost-sharing in higher education and policies that combine a
consideration of tuition fees at universities and colleges with student financial aid
programs.
The differences in cost-sharing in higher education among countries are deeply
rooted in the differences in educational philosophies, each one of which is unique to eachcountry, as they all have for their background different cultural, social and economic
traditions. These philosophies are classified into three types (Figure 1).

6Source: Yano 2012 revised by the author.

Figure 1 Three models and philosophies of education
One philosophy is widely seen in Europe, in particular in Nordic countries such as
Sweden. This philosophy is that education should be sustained by society. The backboneof this philosophy is the view of the welfare state. Thus, educational expenditure iscovered by the government. Tuition fees at higher education institutions are not charged
or are very low in these countries. In Sweden, even three private higher education
institutions are entirely free. We call this type of cost sharing “Public”.
Second, we observe the philosophy of paternalism in East Asian countries such as
Japan and Korea. In these countries, it is believed that the family, usually the parents, areresponsible for the education of their children. Therefore, the family or parents should
pay for the education of their children. We call this philosophy Paternalism. Thus theburden of paying for the education of their children is the heaviest in these countries, andpublic expenditure on education is insufficient. We call this type of cost sharing“Parents”.
Third, we observe a philosophy where the students themselves are responsible for
their education. They should pay for their educational costs. Of course it is difficult foryoung persons to pay for their education while attending school. They may get somemoney from part-time jobs, but this is not enough to pay for their education. Thus, they
will borrow money for their education and repay it after graduation. This is typical inAustralia and England. In the background of this cost-sharing is individualism. We callthis type of cost sharing “Students”.
Many countries seem to be moving toward individualism, that is, the mega-trend of
cost-sharing is shifting from public to private, except for some Nordic countries, and thefamily’s burden for higher education is shifting from parents to the students themselves.
What will happen to access and cost sharing in higher education in Japan, if this is7

correct? This is an important research question. Each contributor will discuss it whileconsidering the experience of their own country.
Related to the cost-sharing issue, I would like to underline that it is very important toanalyze the combination of tuition fees and student financial aid policies. From thisperspective, we provide an overview of trends in tuition fees and student financial aid in
Figure 2. The horizontal axis is tuition fee policy and the vertical axis is student financial
aid policy, especially student grants and scholarships. Most public universities in various
countries are located in the top left of the figure, low tuition/ high aid, but are moving to
the right (a high tuition fee policy) very rapidly. It is interesting that the trends in English
and Chinese universities are very similar. By contrast, other European universities havenot moved drastically. US public universities are shifting from low tuition/ low aid tohigh tuition/ high aid, but Japan’s national universities are moving from low tuition/ low
aid to high tuition/ low aid. The same trend is seen in the case of Japanese, Chinese, andKorean private universities and colleges. The most distinguished feature of the policy inthis figure is the high tuition/ high aid policy of US private universities and colleges. One
must be careful to note that net tuition is very different in all of these policies.

Figure 2 Trends in tuition fees and student financial aid policy in various countries
Why are policies shifting to high tuition/ high aid ? What are the factors behind thisshift? Figure 3 employs the same analytical axes as Figure 2. The most important role oftraditional universities was to foster elites. Therefore, a large amount of public funds wasspent for this purpose. The graduates were very small in number and the public financial
burden was not so heavy that the government was unable to adopt a low tuition or

8tuition-free/ high aid policy.
Educational demand has been increasing in this age of higher education massification.
The need for various kinds of professionals is the driving force behind this massification.
As the number of university students is increasing, it is difficult to maintain low tuition/high aid with public money, and the policy is shifting to low tuition/ low aid.
Furthermore, the massification of higher education continues, and the demand for higher
education surpasses supply. Private universities have been established to fill the gap. Thisis typical of Japan and China. In this policy, governments provide limited subsidies toprivate higher education institutions, where the tuition fees are high, but this aid is
insufficient.
Finally, a high tuition/ high aid policy has appeared. This policy has two aims; toacquire excellent students and improve universities’ finances. Under this policy, the net
tuition fee of each student is different. The net tuition of each student is decided on thebasis of need and/or merit in various systems depending on the policy of each university
or college. As a result, net tuition, differentiated using these criteria, is discounted
through the provision of these institutional grants. Universities and colleges can thenattract more desirable students using this discount policy. Advocates of this policy argue
that it is efficient because it is very different from the low tuition policy, which needs
heavy public and/or institutional subsidies.
From the viewpoint of cost sharing, the four policies are very different. Public sharing
is most common in low tuition/ high aid and the least common in high tuition/ low aid
policies. In the middle comes the low tuition/ low aid policy. The cost sharing of a hightuition/ high aid policy is very different from these three policies, as cost sharing and net
tuition fees vary from one student and/or parent group to another.

9Figure 3 Factors behind the shift in tuition fees and student aid policy
As for Japan, the parental burden of expenditure for tertiary education ranks highest in
the world (Figure 4). The household share of higher education expenditure is more thanhalf the total expenditure of higher education, and among the most expensive in the world,
while public expenditure in tertiary education is the lowest among OECD countries.
Should we or can we maintain this model of financing? The trend toward cost sharing inhigher education seems to be shifting from public to private sources, such as to parents
and the student themselves, but households already bear a heavy burden trying to pay forhigher education.

Source: OECD, Education at a Glance 2015.

Figure 4 Public and household expenditure for tertiary education

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Also, the Japanese government’s deficit has reached more than 960 trillion yen, which
is more than any other developed country. Therefore, we do not expect government
spending on higher education to increase in the future. As a matter of fact, government
subsidies to universities have been stagnating (Figure 5).

Source: MEXT and MOF.

Figure 5 Changes in Government spending on higher education
Government subsidies to national universities have been falling by one per cent a year
since 2004. The amount was about 12.4 billion yen in 2004 but declined to about 11.4
billion yen in 2011. Figure 6 shows government subsidies to private universities andcolleges. Both the amount and ratio of subsidies to current expenditure have been
decreasing. In particular, one should note that the ratio has been rapidly decreasing toabout 10.5 percent of current expenditure.

Source: MEXT.

Figure 6 Changes in Government subsidies to private universities and colleges.

11While subsidies to universities have been decreasing, the tuition fees both in national
and private universities and colleges have been rising dramatically (Figure 7). The tuition
fees charged by national universities in 2010 are more than forty times higher than in
1972, although the changes have been more modest in recent years. Adding to the fall ingovernment subsidies, the increase in expenditure, such as on IT facilities, has forced
most universities and colleges to raise their fees.

Source: MEXT.

Figure 7 Changes in average tuition fees (Current money)
Although the increase in tuition fees has been modest in recent years, families’
disposable income has been decreasing. As can be seen in Figure 8, the ratio of tuition
fees to family disposable income has been increasing gradually, which means the family
burden with respect to higher education has been getting heavier and heavier.

Source: MEXT and Stastical Bureau “Household Survey.”

Figure 8 The ratio of tuition fees to family disposable income

12While the tuition fees of Japanese universities and colleges are very high, we have
limited public grants and scholarships for undergraduate students both in the public sector
and the private sector, except when it comes to tuition waivers. On the other hand, publicstudent loans, in particular the student loans of JASSO (Japan Student Services
Organization) have been increasing rapidly. Shibata’s paper explains JASSO’s student
loans in detail. Here I underline that the Type II (low interest) loans introduced in 1984
have been increasing dramatically both for four-year and two-year undergraduate
students. More than one in three undergraduate students have taken up these JASSO
student loans. By contrast, the number of students who have received JASSO Type I(interest free) loans has been climbing very slowly (Figure 9).

Figure 9 Changes in student numbers who have received JASSO student loans
Thus, we have a serious dilemma between shrinking public support for higher
education and a worsening family burden. Facing this serious situation, should we
promote the shift of cost sharing from public to private further and, moreover, fromparent to student? This is a very big social concern and an important policy issue.

3.

Access to higher education in JapanThe rapid increase in tuition fees and the loan burden have seriously affected families
with prospective university students by influencing their decision on whether or not toapply to university. This is born out by our 2006 nationwide survey of four thousand

13

groups of students and parents, which provides very strong evidence of inequality inhigher education because of the differences in family incomes. The Survey Report has
been published in Japanese by the Center for Research University Management andPolicy at the University of Tokyo, which is led by Professor Kaneko, Motohisa.1
Some results are included in our papers (Kobayashi 2008, Kobayashi and Liu 2014).
The enrollment proportion of the lowest income class was only 35%, while that of thehighest class was 61% (Figure 10). In particular, enrollment in private universities was
highly correlated with income. However, this was not the case at national and public
universities. National and public universities contributed to opening up higher education
opportunities to all income groups, offering relatively inexpensive tuition fees compared
to private universities. The resulting inequality has a strong influence on government
policy, and there has been wide discussion on ways to ameliorate the situation. One
option is to reform the student financial aid repayment scheme, which we will discusslater.

Source: CRUMP, High School Student Survey, 2006.

Figure 10 Destinations of high school leavers by income group, 2006

However, the situation has greatly changed for the parents of high school leavers in
2012. As shown in Figure 11, the enrollment rate in private universities is highly
correlated with income, like in the 2006 survey, but the enrollment rate at national/ public
1This was a large nationwide random sampling survey of high school students and their parents,
in Japan. Four thousand pairs of parents and their high school children were randomly chosenfrom 400 areas all over Japan. The first survey, interviewing parents and their children, was donein the fall of 2005. The follow-up survey for the children was done in the spring of 2006.

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universities is now also strongly related to income, which was not seen in the 2006
survey. This heavy burden on the household has very serious effects on participation inhigher education, especially for private four-year universities and colleges. One can see
in Figure 11 that the enrollment rate of the children in the lowest income group is about
20 percent, while that of the highest income group is more than 40 percent in the Parent
Survey of High School Leavers 2012. Therefore, we observe a disparity in enrollment
rates between the two groups as having more than doubled. As for the enrollment rates atnational and public universities and colleges, the enrollment ratios are 7.4% in the lowest
group and 20.4% in the highest group. Therefore we observe the disparity in enrollment
ratios is almost three times, which is worse than the case for private universities andcolleges.
This is only one piece of evidence of a widening inequality in national and public
universities, and we should conduct surveys to confirm this disparity. However, it isobvious that if this is the case, we should consider more effective student financial aid
programs.

Source: Parents of High School Leavers Survey 2012.

Figure 11 Destinations of high School leavers by income group, 20124.

Who should pay?
Despite the above inequality, we can observe from a global perspective that Japan had a15

comparatively high enrollment ratio and comparative equality in access to higher education,
as higher inequality in the private sector was balanced by equality in the public sector. Thismay be described as the “success” of Japanese higher education. We also found that thissuccess is sustained by very strong parental willingness to pay for their children’s higher
education, even among low-income families. Even the family of the lowest-income class
has a very strong willingness to pay for their children’s education (Figure 10). Three out offour families of the highest income group (with an annual income of more than 10.5
million ) pay all the living costs of their children’s attendance (excluding tuition fees), butmore than half of the families of the lowest income group do the same thing, as is shown in
Figure 12.

Source: Parents of Higher School Leavers Survey 2012.

Figure 12 Portion parents pay for the living costs of their children in higher
education (excluding tuition fees)
It may seem ironic that parents’ willingness to pay for their children’s education
hides this inequality in access to higher education, an inequality which would increase ifparents did not pay. Parental behavior for the sake of their children reduces the politicaland social impact of educational inequality as an issue in Japan. In particular, enrollment
ratios to university and college by income group are not correlated with income when
their children’s academic achievement was in the highest group in the 2006 survey. The
enrollment rate of the highest achievers of the lowest income group was 65% in 2006,
while that of the children of the highest group was 71%. This proves that even the lowest
income families paid their children’s educational expenditure, meanwhile sacrificing their16

living standards if the children are higher achievers.
However, this pattern of enrollment for the highest achievers of the lowest income
group changed a little in our 2012 Survey. The enrollment rate of the highest achievers of
the lowest income group is 57%, while that of the highest income group is 77%. Thus thedifficulty in enrolling in higher education for children of the lowest income group has
been increasing. This is the situation we have to consider when we discuss student
financial aid in Japan.

5.

Student loan schemes and debt problems
As tuition fees increase, the burden on the family to pay the cost of higher education isheavier, and more families take out student loans. However, some families do not use theloans because the debt is so heavy that their children must repay the debt after graduation.
This is called debt aversion or loan aversion. This phenomenon is widely seen in various
countries. It is a very serious problem, because the purpose of student loans is to reducethe burden on a family to pay for higher education, and we cannot accomplish thispurpose if this is the case.
To solve this serious problem, reform of the student loan repayment scheme has
been advocated. ICR is one scheme that could solve this problem because it is similar to akind of “insurance.”
Another problem with student repayment is that some borrowers default. How can
we reduce the number of defaults? In Japan, this number has been increasing. The
reasons for this increase are, one, bigger student loans for low achievers, which places aheavy loan burden on low-income borrowers, two, weak penalties, and, three, anunwillingness to pay. From the point of view of collecting a loan, it is very important todistinguish between an unwillingness to pay and an inability to pay.
Income contingent repayments (ICRs) have been introduced in some countries forthis purpose. One important point is the interest on ICRs. ICRs in some countries, such as
Australia and the UK, are interest free, but in the US the interest rates are high, and theloan repayment period is longer than is the case for other repayment plans. Therefore thetotal amount of repayed ICR is higher than it is for the other plans. So ICRs are not
popular in the US. This shows the key determinant for introducing ICRs is who bears theinterest rates.

6.

Access, the information gap and financial literacy
What creates the difference in enrollment in higher education by income group? The
financial burden of higher education expenditure is a serious cause, as we have discussed.
Recently another cause has been the focus of research in various countries. This is theso-called information gap. Low income families do not have enough information on the17costs and benefits of higher education. Most of them are not familiar with financial
options such as loans. Besides some of them do not know that they are eligible forstudent grants or scholarships. They have limited resources to gather information andoften do not have family members who have any experience of attending higher
education.
Some governments have attempted to improve this situation. For example, in the
Widening Participation program in the UK, the government and Student Loans Company
disseminate information on the costs of higher education. In the United States, some
initiatives to improve the information gap among students have been tried. Two of theseare “School Score Card” and “Shopping Sheet.” In this report, some examples will be
discussed.

7.

The Current Situation in Some Countries
Before the detailed discussion of the situation in each country’s situation in the chaptersthat follow, readers may find it useful to receive a rough outline of what is happening insome of them.
1.

England
Tuition fees and student financial aid policy have been drastically changed in England.
Before 1997, universities did not charge any fees, but tuition fees of 1,000 pounds werepartly introduced in 1998. Not all students were charged 1,000 pounds, and there still
remained free tuition for students from low income families. At the same time, theincome contingent loan was introduced and grants for undergraduate students wereabolished. This was a very drastic reform in the history of English universities.
Then there came another huge change, the 2006 Reform. In this reform, each
university could charge a so-called “top-up fee” of up to 3,000 pounds. Most universities
raised their tuition fees to the maximum 3,000 pounds. At the same time, each university
has an obligation to give bursaries to students, in particular, to students from low income
families. The tuition fees and other details of student financial aid must be determined bya contract called an “Access Agreement” with a new established Office for Fair Access(OFFA). This was introduced to mitigate the worst effects from having raised tuition feesby 300%. Students pay their fees after graduation with income contingent loans. The pros
and cons of this reform will be discussed in Nicholas Barr’s paper.
First, he sets out the three objectives of higher education policy: (a) strengthening
the quality of teaching and research, (b) improving access for students fromdisadvantaged backgrounds and (c) ensuring that the system is large enough toaccommodate all qualified applicants.
Second, he sets out four key lessons from economic theory: (a) that graduates should

18

share in the costs of their degree (b) well-designed student loans should haveincome-contingent repayments (i.e. repayments in the form of x% of the borrower’s
subsequent earnings) (c) competition between universities helps students, and (d)government has a wide-ranging and continuing role.
Third, he sets out a strong finding that, provided a good loan system is in place, themain impediment to access is a lack of good high school graduation grades.
Fourth, he discusses reforms of higher education finance in England in 2006,
arguing that the reforms had quantifiable benefits. He argues that the direction of the2006 reform was almost right. There is no expenditure for a family and student during
their school days. After graduation, they can repay the tuition fees according to theirincome. Thus it is a very rational and effective way of cost-sharing.
He argues, however, that the recent 2012 Reform of tuition fees and student grants
and loans has had serious and deleterious effects. His explanation is very clear andsophisticated. Finally, he considers a potential reform strategy for Japan, while also
discussing the underlying philosophy of student loans. We will discuss his lessons forstudent financial aid policy in Japan in the concluding chapter.
2.

The United States of America
The most distinguishing characteristics of American higher education are its diversity anddynamism. The American higher education system consists of four major groups:
four-year public universities and colleges, four-year private not-for–profit universities
and colleges, two-year public community colleges, and for-profit institutions. Four-year
universities and colleges are sub-grouped into research universities and colleges(doctoral), comprehensive universities and colleges (master), and liberal arts colleges.
Thus, various types of higher education institutions coexist in American higher
education.
The student financial aid system is also diversified and highly complicated. For
example, federal student financial aid programs have several types of federal student
grants, student loans, and campus work study programs. Each state government has its
own student financial aid programs. In addition, there is “institutional aid”, where ahigher education institution gives its students grants or scholarships.
One recent notable trend in higher education in America is that many universities andcolleges have been introducing a “high tuition and high aid policy”, as was discussed in
the previous section. On the one hand, tuition costs and fees have been rising
dramatically. On the other hand, various forms of student financial aid have been
increasing as the tuition and fees have been rising. Nonetheless, from the viewpoint of
cost-sharing, the payment of higher education costs has been shifting from public funding
to families and students.

19

Prof. Laura Perna argues that, as the responsibility for paying college costs has shiftedfrom governments to students and their families, student loans have become anincreasingly common type of financial assistance in nations across the globe. She offers
insights for Japanese policy makers, drawing from what is known about student financial
assistance in the United States.
Her paper is organized to address the following questions:
1. Why do students in the U.S. use loans to pay college costs?
2. What are the primary concerns about the use of student loans in the U.S.?
3. What are government policies for addressing these concerns?
4. What are the relevant insights for future Japanese policymaking?
3.

China
In China, higher education was developing rather slowly until 1991. However the grossenrollment rate has been greatly increasing since then. Before 1999, the rate was below
10%, but quickly reached 15.0% in 2002, and 40.0% in 2015.
This expansion in higher education has mainly been sustained by public universities
and colleges, but one can also see a rapid increase in private higher education institutions.
The share of the public sector is over 70%.
As higher education has grown, tuition fees have been climbing to as high as about
6,000 Chinese Yuan. Most student financial aid programs have been merit-based andonly a small number of students were recipients until 1999. Therefore, the burden of
higher education costs was heavy in particular for low income families. Then thegovernment embarked on reform of the student financial aid programs. New need-based
student financial aid programs were introduced in the 2000’s. There are now several
needs-based student financial aid programs, alongside the merit-based ones. The
government has introduced two new student loan programs, too. One of them is thehome-based student loan program. Here “home” means the homeland of the student andfamily. Traditionally, Chinese students and their families have a strong relationship with
their homeland. In this loan program, students and their families are co-borrowers. This isa unique characteristics of this student loan program. County-level student financial
assistance management centers are mainly responsible for the collection of these loans,but the government bears the entire risk for the compensation fund.
After an overview of China’s higher education and student financial aid schemes,
Professor Wei Jianguo argues thaty this new student loan program is successful. The
share of the recipients of this loan is over 80%, but the default rate was below 3% in
2012.
Then he explains his cluster-randomized controlled trial to find the causal relationship20between information regarding college costs and student financial aid and some related
outcomes. He found that students’ knowledge of student financial aid programs was
relatively low, but there was no evidence that college costs and financial aid information
affects college choice. However, such information definitely affects the likelihood of
non-admitted students retaking the college entrance examination and receiving certain
types of financial aid.
Finally, he argues that the problem of the information gap has been greatly improved byrecent governmental initiatives.
4.

Japan
As I have already mentioned, the share of higher education costs in Japan is the highest
among developed countries. In particular, tuition fees are very high at private higher
education institutions, while at national and public universities and colleges they havebeen dramatically increasing at a more and more rapid pace since 1972.
However, the student financial aid scheme has not changed dynamically in Japan. The
Japan Student Services Organization (JASSO) has been the largest provider of student
loans. In Japan, they have a tuition wavering scheme, especially for national and public
universities and colleges, but there is a shortage of public grants for undergraduate
students. JASSO and the Ministry of Education (MEXT) say that JASSO has two typesof student loan programs. One of them is an interest-free type, which means that the
government subsidizes this program. These subsidies are not indexed to inflation, so they
are completely interest-free (zero interest rate). This is the unique characteristics of thisloan program, and makes it different from Australia’s HECS, which is an interest-freeprogram but the loans are indexed to inflation. Therefore, in reality, the interest is linked
and charged according to inflation in HECS.
Because of this unique characteristic of the JASSO loan program, it is called a“scholarship loan.” Actually, JASSO is the successor of the Japan ScholarshipFoundation, which was established in 1943 and provided interest free student loans from
1944.
Although the interest-free loan is a unique characteristics of the student loan programin Japan, the other type of JASSO student “scholarship loan” is being increasingly used
and this trend is accelerating. Although the interest rate on this loan is below 2% atpresent, it has a cap of 3%, and this low interest loan has been the main student loan inJapan up to now.
In 2012, JASSO introduced an income contingent loan repayment (ICR) scheme for
an interest-free loan program, but this ICR is very limited. Eligible borrowers are
restricted to low income families with an annual income of below three million yen. The
repayment of the loan is deferred when the income of the borrowers is below three21

million yen, but they should repay the total amount as soon as their income is over three
million yen, which introduces the problem of “cliff effects.”
Shibata concisely explains the history and unique characteristics of JASSO’s“scholarship loan” and the reason why the low-interest loan program is increasingly
being used instead of the interest-free loan program. According to him, the main reason
for the increase in the low-interest loan program was that the government was looking for
new investment fields for its fiscal loans funds after a review of its traditional areas of
expenditure, like public works. Then he presents an overview of the present situation of
JASSO’s “scholarship loan”.
His main research question is the following: the growth of the low-interest loan
program has been sustained by the very low interest rate in Japan, but is it possible tosustain this low-interest loan program in the face of declining public support?
He then compares the present JASSO ICR with the British one, and proposes theintroduction of the British scheme.
5.

Comments
After the four papers on the situation in four countries, Yoshitaka Hamanaka madecomments at the international symposium. We include his comments in this report.
He explains the characteristics of Japan’s Student Financial Aid through its unique
historical background. He then submits that current issues are deeply rooted in the
traditional philosophy of higher education and student financial aid in Japan. Finally, hesuggests the introduction of income contingent loan programs. His main concern is thequality of higher education as well as the tuition and student financial aid programs.
We will discuss these questions and issues in the final chapter of this report, whilesumming up the lessons for the student financial aid scheme in Japan and the suggestions
made in each paper and the comments. We believe this is a very fruitful approach when it
comes to considering the future of student financial aid schemes not only in Japan but
also in other countries.

References
Kobayashi, Masayuki (2011), Access and equality in Japanese higher education. IAU
Horizon, 17, 2 (17).
Kobayashi, Masayuki and Liu Wenjun (2013), Access and cost-sharing in Japanesehigher education: Tuition and student financial aid policy updated in 2012. Center for
Research and Development of Higher Education, The University of Tokyo.
Masakazu, Yano (2012), “Kyoikuhi no shakaigaku (Sociology of Educational Costs),” in
Masayuki Kobayashi (ed.) Kyoiku kikai kintou heno chousen (Challenge to Equality of
Educational Opportunity), Toshindou, pp. 427-439.

22

Chapter 2
Financing Higher Education:
Theory, International Evidence and UK Experience

Nicholas Barr
London School of Economics

Please do not quote without permission

23

Chapter 2 Financing Higher Education: Theory, International
2

Evidence and UK Experience

Nicholas Barr

3

Abstract
The initial section sets out the objectives of higher education policy, in particular(a) strengthening the quality of teaching and research, (b) improving access for students
from disadvantaged backgrounds and (c) ensuring that the system is large enough toaccommodate all qualified applicants.
The second section sets out four key lessons from economic theory: that graduates
should share in the costs of their degree; that well-designed student loans should haveincome-continent repayments (i.e. repayments in the form of x% of the borrower’s
subsequent earnings); that competition between universities helps students; and thatgovernment has a wide-ranging and continuing role.
The third section sets out a strong finding that provided a good loan system is in place,the main impediment to access is a lack of good high school graduation grades.
The fourth section discusses reforms of higher education finance in England in 2006,
arguing that the reforms had quantifiable benefits. The fifth section sets out the lesssatisfactory results of reforms in 2012.
The final section considers a potential reform strategy for Japan, including discussionof the underlying philosophy of student loans.

1.

Introduction
Higher education finance in England has seen considerable change.

2This is a revised version of a paper originally published in CESifo DICE Report 2/2012, pp. 56-62.

Fuller discussion can be found in Barr (2012a).
3

Professor of Public Economics, London School of Economics and Political Science, Houghton

Street, London WC2A 2AE, UK: T: +44-20-7955-7482; E: N.Barr@lse.ac.uk;
http://econ.lse.ac.uk/staff/nb.

24

•

In 1990, the government introduced loans with fixed monthly repayments to
supplement tax-financed grants to cover living costs.

•

Reform in 1998, following the Dearing Report (National Committee of Inquiry into
Higher Education, 1997), introduced annual tuition fees of £1,000 and loans withincome-contingent repayments ( i.e. repayments calculated as x per cent of theborrower’s subsequent income, collected alongside income tax) to cover living costs
but not fees.

•

Reform in 2006 introduced variable fees of up to £3,000 but, importantly, covered by aloan, so that nobody had to pay upfront charges (for assessments ex ante and ex post,
see Barr 2004, 2012a).

•

Reforms in 2012 raised the maximum fee to £9,000, made changes to the design of thestudent loan, withdrew most taxpayer support for teaching in the arts, humanities andthe social sciences, and abolished Education Maintenance Allowances and AimHigher
targeted at disadvantaged schoolchildren.
Higher education matters for the transmission of knowledge and skills, the promotionof core values and the pursuit of knowledge for its own sake.

More recently, it has cometo matter also for national economic competitiveness and for individual life chances.

This

article considers the design of higher education finance in pursuit of three specificobjectives:•

Quality: strengthening the quality of teaching and research;•

Access:•Size, i.e. ensuing the sector is large enough so that all qualified applicants can find araising the participation by students from disadvantaged backgrounds; andplace.
The first two objectives are widely accepted. The third is often overlooked. Size isrelevant both to national economic competitiveness and to social mobility.

Implicit inthese objectives are several value judgements: that higher education has intrinsic value;that national economic performance matters; and that widening participation is important.

2.

4

Lessons from economic theory

Lesson 1: Graduates should contribute to the cost of their degree. Higher education
creates social benefits above those to the individual, including the transmission of values,social and political engagement, and economic growth, justifying continuing taxpayer
subsidies.
4

That these are difficult to quantify does not invalidate the argument.

For fuller discussion, see Barr 2012b, Ch. 12.

25

But

graduates also receive private benefits, including higher average earnings and (often
overlooked) more enjoyable jobs.

It is therefore both efficient and equitable that thebeneficiaries should bear some of the costs.

However, students are credit constrained.

Efficient consumption smoothing suggests that they should bear those costs when they canafford them, as graduates.

This leads directly to the second set of lessons.

Lesson 2: Well-designed student loans have core characteristics. Loans should haveincome-contingent repayments.

The original argument was set out by Friedman (1955;

on why loans rather than a graduate tax, see Barr 2012b, p. 331), who noted that borrowing
to finance investment in human capital, in contrast with a home loan, offers no physicalcollateral.

Thus lenders charge a high risk premium, and borrowers also faceconsiderable

risk,

leadingtosub-optimal

investment

in

human

capital.

Income-contingent repayments protect borrowers from excessive risk, and collection via
the tax system reduces the risk to lenders of making an unsecured loan.
Additionally, loans should be large enough to cover fees and realistic living costs, thus
addressing credit constraints and assisting access by making higher education free at the
point of use.

We return to this point in section 6.1 which discusses the different

philosophies that can underlie student loans.
A third feature is that loans should charge an interest rate related to the government’s
cost of borrowing.

Until 2012, the UK, like some other countries, charged a zero realinterest rate. Since that is less than it costs the government to borrow the money, loans
include a blanket interest subsidy – in present value terms not even the best-off graduates
repay their loan in full.

If, as in the UK, loans have (a) income-contingent repaymentsand (b) forgiveness of any balance unpaid after 25 years, interest subsidies areunambiguously bad design.
Since the argument about blanket interest subsidies is central to assessment of the2012 reforms it is worth amplifying. First, the subsidy is expensive. In the UK, nearly
one-third of all lending to students never comes back simply because of the interest
subsidy.

Second, because of the resulting fiscal cost, loans are too small, harming access.

Third, the subsidies crowd out university income, putting quality at risk and, more recently,
leading to a cap on student numbers, hence a shortage of university places. Finally – andcounterintuitively – the subsidies are regressive. Graduates with low monthly earnings areprotected by income-contingent repayments, and those with low lifetime earnings byforgiveness after 30 years. Interest subsidies do not help high-earning graduates early intheir careers: with income-contingent loans, monthly repayments depend only on earnings;
interest rates affect only the duration of the loan. Thus the major beneficiaries are
successful professionals in mid career, whose loan repayments are switched off earlier
because of the subsidy than would otherwise be the case. Shen and Ziderman (2009) give26

an international perspective on the high cost and bad targeting of blanket interest subsidies
Lesson 3: Competition is beneficial. In many countries, higher education has been
centrally planned.

With the sharp increase in the range of subjects taught, central

planning is no longer feasible or desirable.
of information.

The argument has its roots in the economics

Students (in contrast with school children or people with complex

medical problems) are well-informed, or potentially well-informed, and hence better able
than planners to make choices which conform with their interests and those of the economy.
An important exception concerns

people from poorer backgrounds, with implications,discussed below, for the design of policies to widen participation.
Lesson 4: Government has an important continuing role.

The argument forcompetition does not negate a continuing role for government (Barr, 2012b, section 12.4.5).
Government should provide continuing taxpayer support to higher education; ensure that
there is a good loan system; adopt, encourage and mandate policies to widen participation;
regulate the system, for example ensuring that there is effective quality assurance; set
incentives by offering larger subsidies for subjects the government wishes to favour, andlarger subsidies for some students; and redistribute within higher education.

3.

Evidence on the determinants of participation
The evidence points to two central drivers of participation: credit constraints, andconstraints with earlier roots (for fuller discussion, see Barr 2012b, section 12.4.4).
The primary role of student loans is to provide consumption smoothing in the face ofcredit constraints. Though the UK has had income-contingent loans since 1998, discussion
continues to conflate credit-card debt, which is unforgiving, with student loans, which are a
payroll deduction (Table 1).
Table 1 Student loan repayments, UK 2015-16
Annual earnings£21,000£25,000£30,000£50,000

Income tax (monthly)

£173

£240

£323

£784

(NI)

£129

£169

£219

£356

Total income tax and NI

£302

£409

£542

£1,140£0£30£87.50£217.50contributions

are

from

National

Insurance(monthly)(monthly)Loan

repayments(monthly)Notes:

incometax

andnational

insurance

calculated

www.moneysavingexpert.com/tax-calculator/. Loan repayments are calculated from theloan repayment formula (9% of income above £21,000 per year).

27

Constraints with earlier roots arise in several ways, largely manifesting themselves inpoor school grades. In 2002, when students from poor backgrounds paid no tuition fees, 81
per cent of children from professional backgrounds in England went to university; thecomparable figure for children from manual backgrounds was 15 per cent (Education and
Skills Select Committee, 2002, p. 19).

However, about 90 per cent of students with goodhigh school graduation grades went to university, irrespective of their background.

In

other words, controlling for attainment, the socioeconomic gradient in participation largely
disappears (for fuller discussion, see Chowdry et al. 2013) .
Many commentators argue that ‘debt aversion’ harms access, but studies are
frequently flawed because they fail to control for attainment, and thus wrongly attribute to
the credit constraint problems that have their roots in the attainment constraint.

4.

The 2006 reforms in England
1.

The reforms
The 2006 reforms were based explicitly on the theory and empirical evidence in section 2.5
Fees.

Instead of the previous fixed tuition charge of £1,000, universities could

choose what fee to charge up to £3,000 per year.
Loans.

The 1998 system provided an income-contingent loan to cover living costs,

but with no loan to cover fees.

The 2006 reforms introduced a loan to cover fees.

Loans

for fees and living costs charged an interest rate equal to the rate of inflation, so the system
incorporated an interest subsidy for all graduates.6 Any loan unpaid after 25 years is
forgiven.
Policies to widen participation.

The 2006 reforms restored tax-financed grants,

required universities that charged £3,000 to provide students from poor backgrounds with5

See Barr (2012a).

In a comprehensive OECD study, Santiago et al. (2008) reach the sameconclusion.
6

The arguments against blanket interest subsidies were understood and accepted

by government.

The decision to retain interest subsidies was based on the political calculation that otherwise theproposal would be rejected.

That reading was correct: in the key Parliamentary vote, at a time

when the Blair government had a majority of 160, the legislation passed by 5 votes.

28

financial assistance, and established an Office for Fair Access.
Crucially, other reforms tackled inequalities earlier in the system.
•

Policies targeting early childhood included Sure-Start, which provided child care andtraining for mothers on low incomes;a National Child Care Strategy made affordable

child care more available; and nursery school and pre-school places were increased.
•

Increased emphasis on basic skills included a Literacy Hour and Numeracy Hour.

•

Education Maintenance Allowances provided financial support for students from poorfamilies from age 16 to encourage them to stay at school.

•

AimHigher sought to improve the information of schoolchildren and to raise
aspirations.

2.

Outcomes
Notwithstanding widespread misgivings at the time, the 2006 reforms had beneficial
effects.

Between 2006 and 2012 income from tuition fees increased by 87 per cent andstudent numbers by 20 per cent.

In addition, participation improved sharply: between

2006 and 2012, the number of applicants from the most disadvantaged backgrounds
increased by over 50 per cent.
The

Higher Education Funding Council for England (2013) investigatedparticipation by the most disadvantaged quintile: young people living in areas with thelowest participation rates and find that,‘The young participation rate … increased over the period, from 13 per cent for the
98:99 cohort to 20 per cent for 11:12 cohort, representing a proportional increase of +52
per cent. However this increase in participation has not been evenly distributed across theperiod; there was a much larger increase during the second half of the study period, whereparticipation rates increased by six percentage points, compared with the first half, whereparticipation rates increased by one percentage point.’ (para. 38)
An earlier study (Higher Education Funding Council for England 2010) had tested
earlier similar findings:‘Trends in social statistics – such as HE participation rates – that are associated withdeeply rooted differences in advantage do not usually show rapid change. A set ofrobustness and credibility checks give confidence that the analysis in this report isfaithfully describing HE participation trends. In particular, the unusually rapid increases in
HE participation recorded since the mid-2000s for young people living in disadvantaged
areas are supported by changes in the GCSE attainment [public exams at around age 16] of

29

the matching cohorts of young people ….’ (para. 31, emphasis added).

5.

The 2012 reforms in England
1.

The reforms
The 2012 reforms were based on coalition politics and lacked strategic coherence (forfurther detail, see Barr 2012a).
Fees.

The reforms abolished taxpayer support for teaching in the arts, humanities

and the social sciences. Partly as a result, the fees cap was raised from £3,000 to £9,000.
Loans.

The reforms introduce a real interest rate, in most cases 2.2 per cent, broadly

the government’s long-run cost of borrowing.

Nevertheless, loans continue to be

expensive for two reasons discussed below: the level of income at which graduates start to
repay is too high; in addition, universities had an incentive to charge £9,000, since thecosts of non-repayment of loans falls not on the university but on taxpayers.
Participation.

As discussed below, action to widen participation was negative.

The rest of this section evaluates the resulting system (for fuller discussion, see Barr
2012a).

The good elements are the increase in the fees cap; the increase in the interest

rate on loans; improving information for prospective students; and improved support for
part-time study.

The bad elements are the withdrawal of taxpayer support for teaching;

the large increase in the loan repayment threshold, leading to a cap on student numbers;
and the retrograde steps in policies to widen participation.
2.

Progress
Raising the fees cap.

From 2012, universities can charge up to £9,000.

questions arise: should there be a fees cap;Twoand, if so, is it right to increase it?

The case for variable fees is that they (a) bring in additional resources and (b) in
combination with robust quality assurance, strengthen competitive incentives to use thoseresources efficiently.

The argument for some form of regulation of fees is that though

universities compete in terms of teaching, some are also selling access to the student’s
network of peers.

Thus they are selling a positional good, giving them an element ofmonopoly power which, it can be argued, partly explains the very high level of fees atsome US universities.
Why, then, is it right to increase fees?

The cap of £3,000 was too low:it brought inadditional resources but not enough, and produced no variation in price, muting
competitive incentives.

However, the increase is too large because of the mistaken

abolition of taxpayer support for teaching in most subjects.
Increasing the interest rate on student loans.

30

From 2012, the default real interest rate

on student loans was raised to 2.2 per cent, broadly the government’s cost of borrowing
over the long run.
Improved support for part-time study.

The reforms make fees loans available tostudents studying at least 25 per cent of full time.

Widening part-time options assists

participation by offering students a low-cost experiment.
might not take the risk of full-time study.

Someone who is uncertain

The option to dip one’s toe in the water(evening or online study) assists participation.
3.

Regress
Abolishing taxpayer support for teaching.

The reforms largely replace taxpayer

support for teaching (known as the T grant) of the arts, humanities and social sciences by alarger loan entitlement.
The policy is mistaken because it ignores the public benefits of higher education.
Without a subsidy, demand will be below its efficient level:

if universities increase feesby the full amount of lost subsidy, too few students will apply;

if universities do notincrease fees to cover lost subsidy, the risk is an inefficient reduction in quality.
A major driver for this policy is that replacing T grant by loans reduces the budget
deficit as measured by the Public Sector Borrowing Requirement (PSBR). Suppose that it
is estimated that in present value terms 30 per cent of student loans are not repaid.

If totallending is £4 billion, £2.8 billion, the part that will be repaid, is excluded from measured
public spending.

Only the estimated non-repayment of £1.2 billion is included.

Thus replacing T grant of £4,000 per student by a loan has the following effect.
•

A million students each attracting a T grant of £4,000 increases PSBR by £4 billion.

•

A loan of £4,000 for a million students increases PSBR by £1.2 billion.
Thus replacing T grant by an equal loan entitlement reduces PSBR by £2.8 billion.

The main motive for replacing T grant by loans is an accounting trick. There is an apparent
decline in public spending, but at the cost of distorting higher education policy.
Raising the threshold at which loan repayments start.

Under the 2006 arrangements,

graduates repay 9% of income above £15,000 per year. Under the 2012 reforms, therepayment threshold is increased to £21,000 and is indexed to earnings. Any loan balancethat remains outstanding after 30 years will be forgiven.
The higher threshold has profound ill-effects. The change is expensive because it
reduces monthly repayments for everyone including the highest earners. With lower
monthly repayments, more graduates will not repay in full within 30 years. Thus student
loans are fiscally expensive, hence there is an incentive to government to cap student
numbers.

31

The main reason for the policy was to give the political appearance of progressivity.
The reality is that increasing the repayment threshold (a) gives least benefit to low earners,(b) is expensive, and hence (c) leads to restriction of student numbers.

Indexing thethreshold to earnings locks in this regressive pattern.
Adverse effects on participation.

Earlier discussion stressed the importance of priorattainment, and pointed to the improvements that followed the 2006 reforms. The 2012changes are deeply retrograde.
The reforms abolish Education Maintenance Allowances and AimHigher and makecuts to SureStart – the very policies which address problems of participation at theirsource.
A second problem, excessive focus on grants (i.e. non-repayable support), to asignificant extent targets resources at the wrong part of the problem. The error is not justan exercise in academic logic chopping.

In failing to distinguish credit constraints andconstraints with earlier roots, policy is based on the wrong diagnosis and therefore leads tothe wrong prescription. It spends money on ‘free’ higher education rather than onaddressing the constraints on participation that arise much earlier, and thus spends moneyon a policy that does not work.
4.

Conclusion
In the 2006 system the interest subsidy made loans fiscally expensive. The reforms rectify
that problem but loans continue to be fiscally expensive because of the large increase in therepayment threshold.

Thus the new system creates the same problem – the cap on student

numbers – for the same reason – the high cost of loans.
In sum, the reforms are (a) expensive, (b) restrict student numbers and (c) weaken thepolicies that widen participation.

They will not stand the test of time.

The resources

currently spent on a fiscally incontinent loan system should be diverted to restoring some
taxpayer support for teaching, adjusting the design of the loan system so as to relax theconstraint on student numbers, and strengthening policies to widen participation (for fuller
discussion, see Barr 2015).

6.

Some implications for Japan
1.

What is the underlying purpose of student loans?
There are different ways of thinking about student loans:•

As a safety net, i.e. a device for poverty relief; or•As a device for consumption smoothing.
To date, the Japan has seen student loans as a safety net and has therefore sought totarget loans on students from poor backgrounds. It can be argued that that approach was32the right one in an era when higher education was mainly a consumption good for theintellectual middle class. In that world, loans were more an equity than an efficiency
device.
That, however, is yesterday’s world. Skill-biased technological skills has driven up thedemand for skills. Human capital has become increasingly important – countries cannot
afford to waste talent. Thus higher education is necessary both for reasons of national
economic performance and to increase individual life chances.
The growing importance of human capital has a fundamental bearing on the purpose of
student loans: they exist not only to help the poor but to facilitate investment in humancapital more generally. Thus in principle everyone should be eligible for a full loan, i.e.
loans are not targeted. The economic principles underlying this approach are set out earlier
in this paper (see economic theory lesson 1): taxpayer subsidy should reflect the publicbenefits engendered by higher education, and the individual beneficiary should pay for hisor her private benefits.
However, students (the individual beneficiaries) are generally poor in terms of current
earnings, even if rich on a lifetime basis, i.e. students are credit constrained. The purposeof loans is to relieve those credit constraints by making higher education free for students,
enabling them to pay for their private benefits when they can afford it, i.e. as graduatesrather than students. Thus loans are a device for consumption smoothing.
However, borrowing to finance a degree is risky because there is no physical collateral,so efficient consumption smoothing requires an element of insurance. That is the purposeof (and importance of) the income-contingent design discussed in lesson 2. As noted, in the
UK income-contingent repayments provide insurance against low current earnings andwrite-off after 30 years insurance against low lifetime earnings. But (a) it remains the casethat loans are primarily a device for consumption smoothing and (b) resources to widen
participation are more effective when spent earlier in the education system (Chowdry et al.
2013) than on subsidising loans. Thus, except for the insurance element, a well-designed
loan should be broadly self-financing in present value terms, thus releasing resources betterused for widening participation, improving quality, and expanding the system.
The resulting policy can usefully be thought of as having two elements:•

A standard policy of tuition fees financed by income-contingent loans for ‘easy’ cases,
i.e. students from middle-class backgrounds.

•

Targeted policies for more difficult cases, notably students from poorer backgrounds,
to widen participation.

Such policies will have a significant focus on interventions

earlier in the education system.

33

2.

Implications
The analysis in section 2 leads to a strategy with three elements that is relevant to Japan:• Element 1: quality and size: universities should be financed from a mix of taxation andtuition fees (economic theory lesson 1).

Fees give institutions more resources and,through competition (lesson 3) supported by quality assurance (lesson 4), help toimprove the efficiency with which those resources are used.

However, students

generally cannot afford to pay fees or living costs, hence:• Element 2: loans to address credit constraints:

loans with income-contingent

repayments should be large enough to make higher education free at the point of use(lesson 2).

Such loans fix problems of participation for well-informed students withgood school attainment.

If the world comprised only such students, the strategy

would end there.
• Element 3: policies to address constraints with earlier roots, notably lack of attainment,
imperfect information and low aspirations.
To achieve multiple objectives, policy needs multiple instruments. The specificargument is that tuition fees combined with policies to address credit constraints and earlier
constraints on participation address all three of quality, access and size.7

The error often

made in newspaper articles is to consider tuition fees on their own without controlling forother relevant variables such as the availability of loans, policies to increase priorattainment, etc.
Tuition fees alone (element 1) will reduce demand and harm participation; and tuition
fees plus financial support (elements 1 and 2) address only some of the impediments toparticipation.

A considerable literature (e.g. Dynarski 2002, 2003; Long 2007, 2010;

Dearden et al. 2011; see also Perna and Ruiz 2015) considers fees and financial support,
and is sometimes wrongly interpreted as showing the ill-effects of fees. Its real importanceis that it shows the effect of credit constraints, either because there is too little financial
support and/or because complexity reduces the effectiveness of financial support. To theextent that lack of prior attainment, imperfect information and low aspirations are
additional major constraints, it should not be surprising that evidence on the influence onparticipation of college aid per se is equivocal.
7

In terms of economic theory these elements are very familiar: higher fees move people back up

their demand curve;

the pro-access policies shift the demand curve of people from disadvantaged

backgrounds outwards.

34

A more complete treatment needs to consider the full range of constraints.
Paradoxically, it is not only tuition fees that harm participation but also their absence.
McKay and Rowlingson (2011, p. 110) cite Tilly’s (1998) argument ‘that groups withpower try to retain the best opportunities for themselves in what he calls “opportunity
hoarding”’.

Tuition fees on their own do that, but so does tax finance beyond thatcommensurate with public benefits and addressing risk aversion rooted in imperfect
information. There are at least three arguments. First, though tax finance on a sufficientscale can address credit constraints, it does nothing to address the other constraints.
Tax-financed higher education, the system in Britain for over 40 years, produced theshameful participation figures discussed in section 3.
Second, over the past 25 years, higher education in almost all OECD countries has
increasingly lost in the political competition for public resources. The resulting shortage ofresources constrains size, and hence access, if student numbers are capped, and harms
quality if they are not.
Third, tax finance has powerful redistributive effects. There is, of course, no such thingas ‘free’ higher education.

Free is just another word for ‘someone else pays’, so the rightquestion to ask is who pays.

Part of the case for public finance of health care orcompulsory school education is that everyone uses them. Higher education is different:
participation is a matter of choice – and it is mainly people from better-off backgrounds
who participate. Thus the taxes of poorer people, many of whom never even considered
completing high school 8 , pay for the degrees of people mainly from better-off
backgrounds Thus taxation (a) finances an activity consumed mainly by the better off,
which (b) helps to maintain their position among the better off, while (c) simultaneously
harming access through a shortage of places and by crowding out activities that genuinely
widen participation.

A clearer example of opportunity hoarding would be hard to find.

References
Barr, Nicholas (2004). ‘Higher education funding’, Oxford Review of Economic Policy,
Vol. 20, No. 2, Summer, pp. 264-283.
Barr, Nicholas (2012a). ‘The Higher Education White Paper: The good, the bad, theunspeakable – and the next White Paper’, Social Policy and Administration,
8Vol. 46,

68% of 19-year olds applying to university in 2011 had parents with a degree, compared with 28%

for those with parents educated who did not complete high school (Department for Education, 2011,
Chart 2.1.2).

35

No. 5, October 2012, pp. 483–508.
Barr, Nicholas (2012b). The Economics of the Welfare State, 5th edn, Oxford: Oxford and
New York: Oxford University Press.
Barr,

Nicholas(2015).

Is

lowering

the

fees

cap

the

right

policy?,http://econ.lse.ac.uk/staff/nb/Barr_Thoughts_on_the_fees_cap150421.pdf
Chowdry, Haroon, Crawford, Claire, Dearden, Lorraine, Goodman, Alissa and Vignoles,
Anna (2013). ‘Widening participation in higher education: analysis using linked
administrative data’, Journal of the Royal Statistical Society, Series A, 176, Part 2, pp.
431–457.
Dearden, Lorraine ,Fitzsimons, Emla and Wyness, Gill (2011). ‘The Impact of Tuition
Fees and Support on University Participation in the UK’, IFS Working Paper W11/17,
http://www.ifs.org.uk/wps/wp1117.pdf
Department for Education (2011). Youth Cohort Study & Longitudinal Study of Young
People in England: The Activities and Experiences of 19 year olds: England 2010,
Statistical

Bulletin

B01/2011,

http://www.education.gov.uk/rsgateway/DB/SBU/b001014/b01-2011v2.pdf
Dynarski, Susan (2002). ‘The behavioral and distributional implications of aid for college’,American Economic Review, vol. 92(2). pp. 279-285.
Dynarski, Susan (2003). ‘Does aid matter? Measuring the effect of student aid on college
attendance and completion’, American Economic Review, vol. 93(1). pp. 279-288.
Education and Skills Select Committee (2002). Post-16 Student Support, Sixth Report ofSession 2001-2002, HC445, London: TSO.
Friedman, Milton (1955). ‘The Role of Government in Education’, in Solo, Robert A. (ed.).
Economics and the Public Interest, New Brunswick, New Jersey: Rutgers University
Press, pp. 123-44
Higher Education Funding Council for England (2010). Trends in young participation inhigher education: core results for England, Higher Education Funding Council for
England, http://www.hefce.ac.uk/pubs/hefce/2010/10_03/10_03.pdf
Higher Education Funding Council for England (2013). Trends in young participation inhigher education, Issues paper October 2013/28, Higher Education Funding Council for
England, http://dera.ioe.ac.uk/18687/1/HEFCE_2013_28.pdf.
Long, Bridget T. with Riley, Erin K. (2007). ‘Financial Aid: A Broken Bridge to College
Access?’, Harvard Educational Review, Vol. 77, No. 1, Spring, pp. 39-43.
Long, Bridget T (2010). ‘Making College Affordable by Improving Aid Policy’, Issues inScience and Technology, Summer, pp. 27-38, http://www.issues.org/26.4/long.html.
McKay, Stephen and Rowlingson, Karen (2011). ‘The Religion of Inequality’, inHolmwood, John (ed.). A Manifesto for the Public University, London: Bloomsbury

36

Academic.
National Committee of Inquiry into Higher Education (the Dearing Committee) (1997).
Higher Education in the Learning Society: Report of the National Committee (London:HMSO).
Perna, Laura W. and Ruiz, Roman (2015). The Use of Loans to Pay College Costs:
Insights from the U.S., in Chapter 3.
Santiago, Paulo, Tremblay, Karine, Basri, Ester, and Arnal, Elena (2008). Tertiary
Education for the Knowledge Society, Volume 1:
Funding, Quality, and Volume 2:

Special Features:

Special Features:

Governance,

Equity, Innovation, LabourMarket, Internationalisation, Paris: OECD.
Shen, Hua and Adrian Ziderman (2009). ‘Student Loans Repayment and Recovery:
International Comparisons’, Higher Education, No. 3, 2009, pp. 315-33.
Tilly, Charles(1998). Durable Inequality, Berkeley, California: University of California

Press.

37

38

Chapter 3
The Use of Loans to Pay College Costs: Insights from the U.S.

Laura W. Perna, Ph.D.
James S. Riepe Professor
Executive Director, Alliance for Higher Education and Democracy
University of Pennsylvania

andRoman Ruiz
Pre-Doctoral Researcher, Alliance for Higher Education and
Democracy
University of Pennsylvania

39Chapter 3 The Use of Loans to Pay College Costs:
Insights from the U.S.

Laura W. Perna and Roman Ruiz
Abstract
As the responsibility for paying college costs has shifted from governments to students andtheir families, student loans have become an increasingly common type of financial
assistance in nations across the globe. This paper offers insights for Japanese policymakers,
drawing from what is known about student financial assistance in the United States.
The paper is organized to address the following questions:1.

Why do students in the U.S. use loans to pay college costs?

2.

What are the primary concerns about the use of student loans in the U.S.?

3.

What are government policies for addressing these concerns?

4.

What are relevant insights for future Japanese policymaking?
The transferability of the insights identified in this paper to Japan is limited by the

many differences in the economic, political, historical, and demographic contexts of the
U.S. and Japan, as well as the differences in the higher education systems of the twonations.

Nonetheless, this consideration of the concerns about loans and related

government policies in the U.S. suggests the following insights for Japanese policymakers:
1. Consider how the costs of higher education should be shared among relevant
stakeholders and adopt policies that achieve this cost-sharing;
2. Adopt policies that reduce the need for borrowing, especially for students most at risk
for not completing their degree programs;
3. Adopt policies that ensure a positive return-on-investment for students who borrow;
4. Construct a student financial aid system that minimizes complexity of the student
financial aid system in general and student loan system in particular;
5. Adopt policies that ease the financial burden of repayment for borrowers experiencing
financial hardship;
6. Adopt policies that ensure that borrowers have necessary knowledge of loans before
and after entering repayment;40

7. Collect data to monitor experiences and outcomes of student loan recipients andengage in a regular program of research to understand the most effective policies andpractices for improving student loan borrowers’ outcomes and experiences.
Income-driven repayment plans appear to be an effective mechanism for reducing therisk to students that is associated with borrowing and easing the burden of repayment,
especially for individuals with lower incomes. Lessons from the U.S. suggest that effective
implementation of income-driven repayment requires government/taxpayer willingness to
pay the related costs, a mechanism for easily and reliably determining borrowers’ incomes,
and clear communication about the availability and benefits of this repayment plan.

1.

Introduction
Japan seeks to improve the efficiency and effectiveness of its student financial aid system
in order to recognize constrained fiscal resources but while also maintaining student accessto higher education. Japan differs from the United States in terms of many economic,
political, demographic, historical, and other contextual characteristics.
in the United States are facing a similar set of questions.

Yet, policymakers

The U.S. is also challenged tomore strategically use available fiscal resources to increase the nation’s overall level ofhigher education attainment and close gaps in higher education attainment acrossdemographic groups (Perna & Finney, 2014).
As the responsibility for paying college costs has shifted from governments tostudents and their families, student loans have become an increasingly common type offinancial assistance in nations across the globe. From the student perspective, loans are lessattractive than grants, as, unlike grant aid, students must repay the amount of the loan, plus
interest.

Recognizing the potential negative consequences of loans for students,

policymakers in Japan are particularly interested in understanding:1) whether borrowers’

loan debt and loan aversion are problems and, if so, how these problems might be
addressed; 2) whether income-driven repayment is an effective strategy; and 3) how to
improve financial literacy, particularly knowledge of loan programs, among high school
and college students.
This paper offers insights for Japanese policymakers, drawing from what is known
about student financial assistance in the United States.

Examining student loans in the

United States may be useful, given the magnitude of borrowing in this country.

Morethan 9.2 million students received a federal subsidized or unsubsidized loan in 2013-14, up
from about 6.5 million in 2003-04, although down from 10.3 million in 2011-12 (College
Board, 2014). Over the past two decades, the total amount of student loan dollars increased
steadily (in constant 2013 dollars) from an estimated $31.3 billion in 1993-94 to a high of41

$122.1 billion in 2010-11, and then declined to $106.0 billion in 2013-14 (College Board,2014).

Most (91%) loan dollars in 2013-14 were from programs sponsored by the federal

government, while only 9% of loan dollars were from non-federal sources.

The federal

government awards Federal Subsidized Loans (24% of all loans in 2013-14), Federal
Unsubsidized Loans (49%), Parent PLUS Loans (9%), Grad PLUS Loans (7%), andPerkins and other federal loans (2%) (College Board, 2014).9The paper is organized to address the following four questions:2.

•

Why do students in the U.S. use loans to pay college costs?

•

What are the primary concerns about the use of student loans in the U.S.?

•

What are government policies for addressing these concerns?

•

What are relevant insights for future Japanese policymaking?

Why do students in the United States use loans to pay college costs?
Students in the U.S. use loans for at least three reasons:
1.

Loans are a longstanding policy mechanism designed to enable students to pay thecosts of attendance.

2.

Loans are required to pay the growing share of college costs borne by students.

3.

Loans are required to pay the growing costs of higher education.

1.

Loans are a longstanding policy mechanism designed to enable students to pay
college costs.
Student loans have long been used in the U.S. as a mechanism for encouraging more
students to enroll in college.

Federal student loans help to ensure that students have thefinancial resources required to pay college costs and thus help to shift the demand forhigher education to the socially-optimal level (Paulsen, 2001; Avery & Turner, 2012).
Federal loans provide a mechanism for students – most of whom do not have the credit
history or credentials to receive loans on their own – to borrow funds at a relatively low
9Efforts to identify the prevalence and magnitude of borrowing to pay college costs are limited by

the absence of complete information about the use of loans from sources other than the federal
government.

In its annual Trends in Student Financial Aid reports, the College Board estimates

the amount borrowed through loan programs sponsored by state governments and higher education
institutions, as well as private loans from banks, credit unions, and other sources.

Althoughpotentially underestimating the total amount of borrowing through non-federal borrowing, the data
published by the College Board clearly demonstrate that loans have become a common mechanismthat students use to pay college costs.

42interest rate.
What is now known as the federal Perkins loan was first authorized as part of the
National Defense Education Act (NDEA) of 1958.

What is now known as the Federal

Stafford loan was first authorized by the Higher Education Act of 1965.

Over time, thefederal government has adopted additional loan programs and modified various aspects offederal loan programs, including eligibility criteria and borrowing limits.

For instance,

the 1992 amendments to the Higher Education Act expanded the availability of federal
guaranteed student loans by increasing borrowing limits and making available
unsubsidized federal loans to any student and the Parent PLUS Loan for any parent of acollege student regardless of financial need (Chen & Wiederspan, 2014; Dynarski &Scott-Clayton, 2006).

Changes in the authorized maximum loan amounts are an

important determinant of the amount of federal loan debt that students in the U.S.
accumulate, as those who borrow tend to borrow the maximum amount (Avery & Turner,2012).
In the U.S. federal loans were originally viewed as a mechanism to improve college
affordability for students from middle-income families. Need-based grant programs wereassumed to ensure college affordability for students from low-income families (Gladieux,
1995).

Many of the changes in the loan programs over time have also been adopted witha view toward assisting middle-income families (Zumeta et al., 2012).

Despite thishistorical focus on students from middle-income families, today students in the U.S. withall levels of family income use loans to pay college costs.
Although providing a source of capital, loans come with costs to borrowers.

In the2014 report, Borrowing Against the Future: The Hidden Costs of Financing U.S. Higher
Education, the Center for Culture, Opportunity, and Politics at the UC Berkeley Institutefor Research on Labor and Employment estimates that interest payments on student loans(federal and nonfederal) amounted to $34 billion in 2012, a 127% increase in constantdollars from the total amount in 2002.
Federal loans are now a common component of the financial aid packages that U.S.
colleges and universities award to students.

The four current federal loan programs are

the Stafford subsidized loan, the Stafford unsubsidized loan, PLUS loans, and Perkins
loans.

To be eligible for federal financial aid, students (and, if students are financiallydependent, their parents) must complete the Free Application for Federal Student Aid(FAFSA).

(Completion of the FAFSA is also often required to determine eligibility for

financial aid from states and higher education institutions.)

Information from the FAFSA

is used to calculate a student’s “expected family contribution.” Expected family
contribution (EFC) is determined using a federally-legislated formula and takes into
account a family’s income, assets, family size, and number of family members attending

43

college.

Colleges and universities then subtract the EFC from the costs of attendance todetermine a student’s eligibility for financial aid.10

Costs of attendance include the costsof tuition, fees, books, supplies, transportation, room and board, and other educational
personal expenses and are adjusted to reflect a student’s enrollment status (e.g., half-time,
full-time).
Colleges and universities may attempt to meet at least some portion of students’financial need by awarding students a financial aid “package” that includes federal loans,
as well as grants and/or work-study.

In 2013-14, Federal Loans accounted for 34% of aid

awarded to all undergraduates ($62.9 billion) and 61% of aid awarded to all graduate
students ($33 billion) (College Board, 2014).

In these calculations, financial aid includes

federal loans, as well as: grants from the federal government, state governments, colleges
and universities, private organizations and employers; “aid” that is allocated through thefederal tax system (i.e., federal education tax credits and deductions); and “aid” that mustbe earned through work (i.e., federal work-study).

Not considered in these statistics is the

additional debt that students are incurring through private loans and other sources (e.g.,credit card debt, home equity loan, loan from family members).
Students in the U.S. may also use loans to cover financial need that is not met by theirfinancial aid packages.

Relatively few U.S. higher education institutions have sufficient

resources to meet 100% of the financial need that is not covered by federal or state
government-sponsored financial aid for all students.

The amount of “unmet need,”defined as the amount of financial need that remains after subtracting loans, grants, andother discounts, has been increasing over time, and is highest for students from thelowest-income families, even though students from lower income families tend to attend
institutions with lower costs of attendance (Cahalan & Perna, 2015).

In 2012, average

unmet need ranged from $8,221 for students in the lowest family income quartile, to$6,514 for students in the 2nd lowest family income quartile, to $1,047 for students in the
3rd family income quartile; students from the highest income quartile had no unmet
financial need (Cahalan & Perna, 2015).

Borrowing (through private loans, credit cards,

and other sources) is one of the few options that students in the U.S. have to pay college
costs that are not covered by financial aid.
2.
10Loans are used to pay the growing share of college costs borne by students
Some institutions (e.g., University of Pennsylvania and other highly-selective colleges anduniversities) use additional criteria for determining need.

For a listing of institutions that use“Profile” to capture more data than is collected on the FAFSA, see:https://profileonline.collegeboard.org/prf/PXRemotePartInstitutionServlet/PXRemotePartInstitution
Servlet.srv

44

Another reason that students in the U.S. are using loans is that, especially in recent years,
the share of college costs that is borne by students and their families has increased while
the share of costs paid by state and local funds has declined.

State and local sources

accounted for 57% of higher education institutions’ revenue in 1977, but just 39% in 2012.
Conversely, students and parents contributed about 33% of the revenue needed to support
the higher education system in 1977, but 49% in 2012 (Cahalan & Perna, 2015).
The shifting responsibility for paying college costs from state and local government to
students reflects an assumption that, as the primary beneficiary of higher education,
students should pay the costs (Perna & Finney, 2014; Zumeta et al., 2012).

Although theindividual benefits of higher education are considerable, society also benefits when higher
education attainment increases.

With higher levels of educational attainment come not

only higher earnings for individuals, but also public benefits like less reliance on social
welfare programs, lower crime rates, greater civic engagement, and more (Baum, Ma, &Payea, 2013).
3.

Loans are required to pay the growing costs of higher education

Students in the U.S. are also using loans to pay college costs because the costs ofattendance have been increasing at a faster rate than inflation and family incomes. Growthin tuition and fees is one force that contributes to greater cost-sharing (Johnstone, 2010).
The rate of growth in college costs has also exceeded the rate of growth in the Federal Pell
Grant – the largest federally-sponsored grant program that is specifically targeted toward
students with the demonstrated financial need.

The purchasing power of the Pell Grant

has diminished considerably over time, covering 67% of average college costs in 1975 but
only 27% of costs in 2012 (Cahalan & Perna, 2015).

3.

What are the primary concerns about the use of student loans in the U.S.?
Federal student loans have certainly provided a mechanism for many students and theirparents to secure the financial resources required to pay college costs.

As such, it is likelythat the availability of federal student loans has helped shift the demand for higher
education toward the socially-optimal level.

Federal student loans have also likely eased

the financial pressures that students, including students from middle-income families,
experience as they endeavor to pay college costs.
Although some (e.g., Avery & Turner, 2012; Dynarski & Scott-Clayton, 2006) stressthese and other benefits of loans, there are also reasons to be concerned about the use ofloans in the U.S. to pay college costs.

This section discusses the following four related

concerns:
1) Implications of student loan debt for other life choices;
2) Prevalence of borrowing among students attending for-profit institutions;453) Riskiness of loans, especially for students from low-income families andfirst-generation college students; and
4) Complexity of providing information about loans and repayment options.
1.

Implications of student loan debt for other life choices

In the U.S. both the share of individuals with student loan debt and cumulative debt levels
have been increasing.

About 42% of all 25-year olds in the U.S. had student loan debt in2012, up from about 26% in 2004 (Lee, 2013).

In constant 2013 dollars, average debt perborrower rose over the past decade from $22,900 in 2002-03 to $27,300 in 2012-13, while
average debt per graduate grew from $12,800 to $16,500 (College Board, 2014).

Over

the past decade, inflation-adjusted total outstanding student debt increased by 152%, thenumber of borrowers with outstanding student loan debt increased by 86%, andinflation-adjusted average outstanding student loan debt per borrower increased by 35%(College Board, 2014).
Some recent research in the U.S. suggests that with greater student loan
debt comes greater psychological stress and financial worries (Walsemann, Gee,
& Gentile, 2015).
Student loan debt may also influence students’ willingness to engage in other life activities,
including enrolling in graduate education, getting married, having a family, and buying ahouse (Gale, Harris, Renaud, & Rodihan, 2014; Heller, 2008).

Total student loan debt

rose steadily over the past decade – even during the Great Recession. Moreover, since2008, other types of non-mortgage debt, such as auto loans and credit card debt, havedeclined (Lee, 2013). Declines in non-student debt have been particularly large among
borrowers with the highest student loan debt (Lee, 2013).
2.

Prevalence of borrowing among students attending for-profit institutions

Another concern about student loans is the high rate and amount borrowed among students
attending for-profit institutions.

Both the rate of borrowing and the amount borrowed are

higher, on average, for students attending for-profit institutions than for students attending
other types of institutions (College Board, 2014). For instance, nearly all (88%) students
graduating with bachelor’s degrees from for-profit institutions in 2011-12 used loans,compared with 75% of students at private not-for-profit institutions and 66% of students at
public institutions (Cahalan & Perna, 2015).

Nearly half (48%) of individuals who

received bachelor’s degrees from for-profit institutions in 2011-12 had more than $40,000
in cumulative debt, compared with only 20% of those who received their degrees fromprivate non-profit four-year institutions and 12% of those who received their degrees frompublic four-year institutions (College Board, 2014). Only 14% of individuals who received
certificates from for-profit institutions in 2011-12 had no cumulative debt, compared with46

65% of those who received certificates from public two-year institutions (College Board,2014).
The higher rates and amounts of borrowing among students who attend for-profit
institutions are concerning because rates of completion are lower, on average, at these
institutions than at other types of higher education institutions.

Only 42% of students

who entered a for-profit four-year institution for the first-time, full-time in 2005 completed
a bachelor’s degree within six years, compared with 57% of students who began at a public
four-year institution and 65% who began at a private not-for-profit four-year institution(National Center for Education Statistics, 2013).
High rates of borrowing for students who attend for-profit institutions are also ofconcern because of the uncertain economic value associated with the credentials that areearned at some of these institutions.

Research shows that unemployment rates are higher

and average earnings are lower for students who attend for-profit institutions than for theirpeers who attend other types of institutions (Deming, Goldin, & Katz, 2011).
Given the patterns in completion and employment, it is not a surprise that students who
attend for-profit institutions average higher default rates than students who attend othertypes of institutions.

In FY 2011, borrowers who attended for-profit institutions

represented 44% of those in default and 32% of those in repayment, but only 10% of
full-time equivalent enrollments (College Board, 2014).
3.

Riskiness of loans

Because the amount borrowed must be repaid (with interest in the U.S.), loans are
inherently risky.

Most students borrow relatively small amounts.

In 2013, 40% of loanbalances were less than $10,000 and an additional 29% were between $10,000 and$25,000; just 13% exceeded $50,000 (College Board, 2014).
Research shows, however, that the amount borrowed is a far less important predictor of
student loan default than the type of institution attended, whether the student finishes the
program of study, and whether the student obtains a job after completing the degree
program (Hillman, 2014).

A student is much more likely to attain a job that pays theearnings required to repay a loan debt if the student successfully completes the curricular
program (Gladieux & Perna, 2005).
institutions in the U.S.

Completion rates are low at many higher education

On average, only 39% of students who entered a four-year

institution for the first-time, full-time in 2005 completed a bachelor’s degree within four
years; only 59% completed within six years (National Center for Education Statistics,
2013).
Current and prospective students have varying tolerance for the risks of loans, leading
to differences in the willingness to use loans to pay college costs.

Consistent with theeconomic theory of human capital, scholars (e.g., Perna, 2006) assume that, fundamentally,47

students make decisions about whether to enroll and persist in college based on acomparison of the expected net benefits with the expected costs.

As an obligation thatmust be repaid, a student may not perceive that student loans reduce the costs of attending
college.

Moreover, student loans come with costs, including the interest on the amountborrowed and loan origination fees.

Some research (e.g., Perna, 2008) suggests that

individuals from low-income families and who are the first in their families to attend
college are particularly reluctant to use loans to pay college costs, while other studies (e.g.,
IHEP, 2008) find differences in the willingness to take on debt among students fromdifferent racial/ethnic groups.

Some who are unwilling to borrow may forgo higher

education, enroll at a less-expensive institution, or enroll part-time rather than full-time –choices that all are associated with lower degree completion rates.

Others may attempt tofinance college costs by forgoing loans and instead engaging in high amounts of paid
employment (Gladieux & Perna, 2005).

Yet, working a high number of hours limits theamount of time students can devote to their coursework, and also often leads to longer
time-to-degree and lower rates of degree completion (Perna, 2010).
Some of the varying willingness to borrow would seem to be appropriate, particularly
among students from low-income families.

Default rates tend to be higher for students

from low-income families than for students from higher-income families, and higher for
students from racial/ethnic minority groups than for White students (Gross et al., 2009;
Hillman, 2014).

Default is problematic, as borrowers who default on their loans may

experience “a damaged credit rating, tax refund offset, or garnished wages” (The Domestic
Policy Council, The Council of Economic Advisers, 2014, p. 11). A damaged credit rating
may impact “one’s ability to purchase or rent a home, open a bank account, or finance avehicle” or even the hiring process (if a credit check is required for a particular position).
Even if students do not default on their loans, high debt burdens may cause other financial
hardships and reduce their ability to pay off other debt (The Domestic Policy Council, The
Council of Economic Advisers, 2014).
4.

Complexity of providing information about loans and repayment options

The complexity of the student financial aid system in the U.S. complicates efforts to ensurethat all students have accurate and complete knowledge and information about therequirements and obligations of their loans.

As the U.S. Department of Education (2010)

notes, accepting a loan “is as simple as signing a promissory note” (p. 16).

But, making

sure that students understand the terms of the promissory note is more complicated.
Many forces contribute to the complexity of providing information about loans,including changes in the provisions and structure of loan programs over time, the multiple
providers of loans, and the lack of standardization of financial aid award letters.

These

and other forces contribute to confusion among students about the terms and obligations of48

the financial aid that they are awarded, as well as other misunderstandings (e.g., thedistinction between grant and loan aid) (Advisory Committee on Student Financial
Assistance, 2011; Perna, 2008).
Students are borrowing funds from multiple forces to pay college costs.

These sources

include the federal government, as well as non-federal sources including private lenders,colleges and universities, friends and relatives, and other sources.

Even when loans are

only from the federal government, eligibility criteria and terms (e.g., interest rate, annual
loan limit, maximum loan limit, lender, grace period) depend on whether a loan is aFederal Perkins Loan, Direct Unsubsidized Stafford Loan, Direct Subsidized Stafford Loan,
Direct PLUS Loan, or Direct Consolidation Loan.

In 2013-14, 24% of undergraduates

had both subsidized and unsubsidized loans, 6% had only subsidized loans, and 4% had
only unsubsidized loans (College Board, 2014).
Financial aid administrators at higher education institutions in the U.S. perceive that“misinformation and miscommunication between [loan] servicers and borrowers”
contributes to “confusion, misunderstanding, and ultimately, missed payments and default”(NASFAA, 2015, p. 6).

Understanding payment and repayment options is complicatedwhen borrowers have “multiple loans, with different terms, conditions, and servicers”(NASFAA, 2015, p. 6).

Because the U.S. Department of Education has not developed astandardized set of procedures for loan servicers, “not all servicers are handling servicing
procedures in the same manner” (p. 9), leading to confusion among borrowers andchallenges for financial aid administrators who wish to counsel borrowers. In its report,
NASFAA also notes that, unlike other types of consumer debt, federal student loans in the
U.S. do not have such “typical consumer credit protections” as “standardized processes forstatements and payment handling, service transfers, error resolutions, delinquency
servicing, and military service” (p. 8).
Efforts by financial aid administrators to ensure that students have accurate andcomplete information about their loans are complicated by the complexity of student
enrollment patterns.

In the U.S., the onus is on students to notify their loan servicer when

they graduate, withdraw, change enrollment status (e.g., to less than half-time), transfer toanother institution, or enroll in graduate school, or when they change their name, address,
or Social Security number (U.S. Department of Education, 2010).

4.

U.S. Government policies for addressing concerns about student loans
The federal government has adopted – to varying degrees – a number of policies foraddressing concerns about student loans.

This section provides an overview of policies

with the following goals:•

Reduce the need for students to borrow;

49•

Reduce the use of private loans;•

Encourage positive return on a higher education investment;•

Forgive loans for borrowers who meet particular requirements;•

Provide mechanisms for borrowers to temporarily reduce payments;•

Reduce the financial burden of repayment; and•Improve students’ knowledge of loans.

1.

Reduce the need for students to borrow

One policy strategy for addressing concerns about loans is to reduce the need for students
to borrow.

Policymakers can reduce the need for students to borrow through policies thatencourage higher education institutions to control or limit increases in the costs ofattendance, increase the share of costs that are covered by state and local governments (e.g.,through state and local government appropriations to higher education institutions), andincrease the availability of need-based grants from the federal government (e.g., Federal
Pell Grant), state governments, and colleges and universities.
One institution-level policy to emerge over the past decade is the Loan Replacement
Grant (LRG) initiative.

A very small number (approximately 50) highly selective

four-year colleges and universities in the U.S. have adopted LRG programs that either
entirely replace loans with grant aid in students’ financial aid packages (i.e., “no-loan”) or
greatly reduce loan burden by capping the amount of loans offered to students (Lips, 2011;
Perna et al., 2011).

As suggested by the trends discussed earlier in this paper, however,more effort is required in the U.S. to productively reduce the need for students to borrow.
2.

Reduce use of Private Loans

Federal student loans offer distinct financial benefits over private student loans that include
a fixed and typically lower interest rate; an interest subsidy (i.e., the government pays theloan interest while high-need students are enrolled in college); and safeguards for students
who face financial hardships (e.g., deferment, forbearance, income-driven repayment
plans) (Federal Student Aid, 2015b).

Despite the benefits of federal loans, students in the

U.S. may elect to take private loans for several reasons.

They may attend institutions

with a high cost of attendance and have unmet financial need.

Some students may use

private loans without full understanding of the distinctions between federal and privateloans, as some users of private loans have not borrowed the maximum amount allowed
under the (lower-cost) Direct Loan program (Consumer Financial Protection Bureau, 2012;
Wegmann, Cunningham, & Merisotis, 2003).
In the U.S. the use of private loans grew steadily through the mid-1990s to reach a highof 26% of all loan dollars in 2006-07 (College Board, 2014).

During the rapid growth

period from 2005-2007, private lenders increased marketing directly to students and50

relaxed borrowing qualifications (e.g., giving loans to individuals with lower credit scoresand without demonstrated financial need) (Consumer Financial Protection Bureau, 2012).
Since 2008 private lenders have changed their underwriting policies, however, and now
require more loans to be co-signed and have tightened credit standards.

The College

Board (2014) reports that the share of loan dollars from private sources declined from 12%
in 2008-09 to 9% in 2012-2013.
The Higher Education Act of 1965 included the authorization of the Guaranteed Student
Loan (GSL) program.

Whereas the National Defense Student Loan Program used federal

capital to provide student loans, the GSL program (later renamed Federal Family
Educational Loan program) combined private capital with federal subsidies to banks.
Essentially, the federal government provided a subsidy to ensure banks would realize a
specified interest rate, guaranteed nearly all loan principal and interest in case of aborrower’s default, and paid service fees to loan guaranty agencies (Field, 2010).

Over

time, economists and policymakers cited the FFEL program as inefficient and prone toabuse among private lenders.

With the federal government’s increased role in providing

capital to banks for student lending during the credit crunch of the Great Recession, theFFEL program essentially became a “subsidy-laden version of Direct Lending” (Field,
2010, para. 15).

The Student Aid and Fiscal Responsibility Act in 2010 eliminated the

FFEL program and the associated subsidies to lenders.

Since July 2010, all new federal

student loans have been made under the Direct Loan program (New America Foundation,2012).
3.

Encourage positive return on investment

Another public policy strategy for addressing concerns about loans is to increase thelikelihood that students will realize a positive return on their investment in higher
education (and thus have the employment and earnings required to repay the amountborrowed).

One approach is to adopt policies that promote meaningful improvements incollege completion rates.

Some state policymakers have adopted “outcomes” or“performance” based assessment or funding policies with the goal of financially rewarding
institutions that meet college completion targets.

As of December 2014, 26 U.S. states

were allocating funding to implement performance-based funding policies, and 10 more
were developing such policies (Snyder, 2015).

The implemented policies vary on many

dimensions, including the percentage of total state funding for higher education institutions
that is allocated based on performance and the particular measures of performance.
Although politically popular, however, research to date suggests that these policies have
had a minimal impact on increasing college retention and completion rates (e.g., Dougherty
et al., 2014; Rutherford & Rabovsky, 2014).
A federal policy that may be intended to ensure that borrowers realize a positive return51

on their investment is the Gainful Employment regulation issued in October 2014 by the
U.S. Department of Education.
conditional

on

the

The regulation makes eligibility for federal student aid

debt-to-earnings

ratio

of

students

who

graduatefromvocationally-oriented postsecondary education programs that are expected to lead to thegainful employment of graduates (U.S. Department of Education, 2014).

Student loan

default rate was one of the initially proposed metrics but was not included in the final
regulations (Fain, 2014).

Although not limited to for-profit institutions, the U.S.

Department of Education (2014) estimates that, if implemented, 99% of the 1,400
programs that will not meet the requirements of the new regulation are located at for-profit
institutions.
The Gainful Employment regulation is scheduled to become effective July 2015, but
implementation remains uncertain.

In November 2014 the Association of Private Sector

Colleges and Universities (APSCU), an organization that represents for-profit colleges,
filed a lawsuit seeking to overturn the measure.

The APSCU lawsuit mirrors the responseof a lawsuit filed against a 2011 version of the gainful employment regulation. After three
years of litigation, a federal judge ruled against the U.S. Department of Education’s earlier
version of gainful employment in 2013.
4.

Forgive loans for borrowers who meet particular requirements

The National Defense Student Loan System, established as part of the National Defense
Education Act of 1958, was the first federal financial aid policy to include a loan
forgiveness clause (Fuller, 2014).

Under this clause, borrowers could have a portion of

their loan forgiven for each year of teaching in a public elementary or secondary school.
Today, under the Federal Perkins Loan Program, borrowers may have a percentage of theirdebt cancelled for each year completed in specified areas of public service (e.g., Peace
Corps, U.S. armed forces, Head Start, nursing) (Federal Student Aid, 2015c).
The federal government also offers other loan forgiveness programs.

Through the

Teacher Loan Forgiveness Program, borrowers may have up to $17,500 of their Direct
Loan balances forgiven if they teach in a low-income elementary or secondary school for
five consecutive years.

Established as part of the College Cost Reduction and Access Act

of 2007, the Public Service Loan Forgiveness Program is the federal government’s mostrecent and least restrictive loan forgiveness program.

Through this program, borrowers

may have outstanding Direct Loan debt forgiven after they have made 120 regular
payments while working full-time for a qualifying public service organization (Federal
Student Aid, 2015c).
In addition to loan forgiveness, the federal government will also cancel and dischargeloans under certain conditions.

For borrowers who become permanently disabled or die,all federal loans are discharged.

The federal government may also discharge a student’s

52

loans if the higher education institution attended closes before the student can complete theprogram of study or closes within 120 days of a student’s withdrawal from an institution.
The federal government does not automatically discharge outstanding federal loan debt for
student bankruptcy (Federal Student Aid, 2015c).
Few studies have examined the effectiveness of forgiveness programs. Nonetheless,these programs are politically and publicly supported as a mechanism for addressing
workforce needs and promoting college affordability (Harnisch, 2009).
5.

Provide mechanisms for borrowers to temporarily postpone or reduce payments

The federal government allows borrowers to temporarily stop or reduce loan payments
through two mechanisms:

deferment and forbearance.

postpone repayment of principal and interest.

Through a deferment, borrowers

During the period of deferment, the federal

government may pay the interest for Federal Perkins and Direct Subsidized Loans.
other loans, interest will continue to accrue.

For

Deferments are available for borrowers whoare enrolled in a postsecondary educational program at least half-time or an approved
graduate fellowship program, unemployed, experiencing economic hardship or serving in
the Peace Corps, serving in the military during a war, military operation, or national
emergency (Federal Student Aid, 2015a).
may apply for a forbearance.

Borrowers who do not qualify for deferment

A forbearance will allow a borrower to postpone or reduce

payments for up to 12 months (although interest will continue to accrue).

A lender may

grant a discretionary forbearance to borrowers experiencing financial hardship or illness
and is required to grant forbearance to eligible borrowers in a medical or dental internshipor residency program, borrowers for whom monthly student loan payments represent morethan 20% of their monthly gross income, and borrowers who are serving in various
national service, teaching service, or military service capacities (Federal Student Aid,
2015a).
NASFAA (2015) recommends that the U.S. Department of Education standardize
policies and procedures related to approving requests for deferment and forbearance, as
well as policies and procedures pertaining to the sharing information between servicers
when the designated loan servicer changes, requesting from institutions updated borrower
contact information, reporting to credit agencies, processing of public service loan
forgiveness income-driven repayment, applying pre-payments, training servicers, andmeasuring the quality of customer service.
6.

Reduce the financial burden of loan repayment

The standard repayment plan for federal student loans borrowers in the U.S. is 120 equalmonthly payments (that is, monthly payments for 10 years).

The federal government

offers three repayment options designed to lower monthly payments.

One option allows

borrowers to keep the same 10-year repayment period but with graduated payments; initial53monthly payments are low but then gradually increase over time until the loan is repaid.
A second option allows borrowers to extend the repayment period to up to 25 years, with
fixed or graduated monthly payments (Federal Student Aid, 2015d).

A third option isincome-driven repayment.
Income-driven repayment plans were first authorized as part of the 2008 amendments
to the Higher Education Act (Akers & Chingos, 2014).

There are now three types ofincome-driven repayment plans: Income-Based Repayment (IBR), Income-Contingent
Repayment (ICR), and Pay As You Earn Repayment (PAYE).

Under these plans“borrowers make monthly payments based on their earnings rather than a traditionalschedule of flat payments” (Akers & Chingos, 2014, p. 2).

IBR and PAYE plans limit

maximum monthly payments to 15% and 10% of discretionary income, respectively, while
ICR monthly payments are the lesser of 20% of discretionary income or an
income-adjusted fixed payment calculated over a 12-year repayment plan (Federal Student
Aid, 2015d).

For all income-driven repayment plans, unpaid loan debt is forgiven after

20 to 25 years.

All Direct Loan borrowers whose high loan amounts and/or low earnings

prevent them from repaying their loans in the traditional 10-year timeframe (i.e., Standard
Repayment Plan, Graduated Repayment Plan) are eligible to enter IBR and PAYE plans.
The same eligibility guidelines hold for participation in the ICR plan, except that parents
who received PLUS loans on behalf of their student are not eligible (Federal Student Aid,
2015d).
Income-driven repayment plans may have some unintended negative consequences
including encouraging borrowers to pursue lower-paying jobs or higher education
institutions to increase tuition (Gillen, 2013).

But, income-driven repayment also has

benefits, including easing the burden of repayment and eliminating “the possibility ofdefault” (Gillen, 2013, para. 5). Both IBR and PAYE plans may be especially important to
low-income borrowers.

In a simulation of repayment patterns for those who obtain abachelor’s degree, Akers and Chingos (2014) projected that three-quarters of participantsin these plans would be “borrowers with incomes in the lowest quartile” (Akers & Chingos,
2014, p. 2).
At least three forces have limited the effectiveness of income-driven repayment plansin the U.S.

One pertains to political opposition to the financial costs of these plans.

Thegovernment’s cost of these plans is influenced by the repayment requirements, including
the number of payments before a loan is forgiven and the percentage of income at whichmonthly payments are capped (Gillen, 2013).

The plans also have administrative costs.

Akers and Chingos (2014) estimate that the extended repayment (with lower monthly
payments) of IBR and PAYE plans would account for a third of the cost.
costs come from the loan interest benefit and loan forgiveness.

54

The remainingIn the U.S. the continued role of income-driven repayment plans will depend on thefederal government’s willingness to pay the financial costs.

In June 2014 President

Obama proposed expanding the PAYE program to serve an additional five million student
loan borrowers by December 2015 (The Domestic Policy Council, Council of Economic
Advisers, 2014) and in early 2015 proposed an increase of $21 billion for all
income-driven repayment plans (Stratford, 2015).

Nonetheless, in March 2015

Republican members of the House of Representatives challenge expansion ofincome-driven repayment because of the financial costs to the government/taxpayers (Field,
2015a, para. 2).
A second force influencing the effectiveness of income-driven repayment in the U.S.
pertains to the processes for determining borrowers’ incomes.

The Internal Revenue

Service (IRS) and the Department of Education partnered in 2012 to create “an online
application that lets borrowers get their required income information directly from the IRS”
(The White House, 2015).

Nonetheless, borrowers who select income-driven repayment

must still annually certify their income.

Those who do not provide the required

certification are shifted from income-driven repayment to the standard repayment plan
(Field, 2015b).

Between 2013 and 2014, 57% of the 700,000 borrowers in income-driven

repayment plans did not provide the necessary certification on time (Field, 2015b).
Although some borrowers subsequently re-enrolled in income-driven repayment plans,
others became delinquent (Field, 2015b).

President Obama has called for continued

collaboration between the Departments of Treasury and Education “to simplify the process
to verify income and keep borrowers enrolled in income-driven repayment plans” (TheWhite House, 2015, para. 6).
The effectiveness of income-driven repayment in the U.S. is also limited by the
relatively low rates of participation.

Although the U.S. Department of Education has

engaged in efforts to communicate the availability of income-driven repayment especiallyto delinquent borrowers, the share of borrowers who select this repayment option continues
to be lower than projected (Field, 2015b; “Modest uptick for income-based repayment,”2014).

In 2013-14, nearly two-thirds (63%) of Federal Direct Loan recipients withoutstanding balances were using the standard repayment plan (with level payments for ten
years or less).

About 9% were using level payments over more than 10 years, 12% wereusing graduated repayment, and 14% were using income-driven (College Board, 2014).
The 14% of borrowers who were enrolled in income-related repayment driven plans held
28% of the Federal Direct Loan program’s outstanding debt (College Board, 2014).
7.

Improve students’ knowledge of loans

Young adults in the U.S. are required to exercise judgment with complex financial
decisions pertaining to student loans, credit cards, and other types of debt.

55

Researchsuggests that financial illiteracy is a problem among youth in the U.S., particularly for
racial/ethnic minorities, women, and youth from households with low educational
attainment (Lusardi, Mitchell, & Curto, 2009).

Perhaps because of insufficient financial

literacy, some students are not borrowing optimally (Avery & Turner, 2012).
Sub-optimal use of loans includes the use of (expensive) credit card debt rather thanstudent loans to pay college costs and the tendency to work a high number of hours while
enrolled rather than borrow (Avery & Turner, 2012; Gladieux & Perna, 2005).
With the goal of improving knowledge and understanding of student loans, the U.S.
Department of Education requires that all first-time borrowers complete entrance
counseling before they receive their first loan disbursement and complete exit counselingbefore the end of enrollment at their higher education institution.
required for recipients of Parent PLUS loans.)(Loan counseling is not

These 30-minute online counseling“sessions” include information intended to help students: “understand your loans, manage
your spending, plan to repay, avoid default, and make finances a priority” (U.S.
Department of Education, n.d., para. 3).

The U.S. Department of Education also offers

optional online Financial Aid Counseling, designed to provide “tools and information”
pertaining to financial aid and financial management.
Some (e.g., NASFAA, 2015) argue that the U.S. Department of Education should also
require borrowers to complete the Financial Awareness Counseling tool.

According to

NASFAA (p. 9), this tool provides borrowers with a more complete understanding of thebenefits of various repayment strategies as well as “budget management exercises,
including an in-school budgeting tool; and tips and options to avoid default by postponing
repayment or reducing monthly payment amounts.”
Developed by the Obama Administration, the College Scorecard and the Financial Aid
Shopping Sheet are additional tools intended to help families make more informed
financial decisions (The Domestic Policy Council, The Council of Economic Advisers,
2014).

Each institution’s College Scorecard now includes data for four indicators(average net price, six-year graduate rate, federal student loan default rate, and medianfederal loan borrowing) and has a placeholder for a fifth forthcoming indicator(employment outcomes).

In December 2014 the Obama Administration released plans

for a new “College Rating System” that is expected to provide additional indicators ofhigher education institutions’ performance prior to the beginning of the 2015-16 academic
year.
Implemented in the 2013-2014 academic year and adopted by more than 2,000
postsecondary institutions, the Financial Aid Shopping Sheet is a standardized financial aid
award template that is designed to facilitate cross-institution comparisons for prospective
students and their families.

56

Some observers assert the effectiveness of outreach and communication efforts inincreasing borrowers’ knowledge of loans.

In an effort to increase Direct Loan borrowers’

awareness of the their repayment options and reduce repayment burden, “outreach efforts
by the Department of Education, and the Department of Treasury’s work in partnershipwith private sector tax preparers, have contributed to greater numbers of student borrowers
enrolling in income-driven plans” (The Domestic Policy Council, The Council of
Economic Advisors, p. 12-13).

Enrollment in income-driven repayment plans increasedby more than 40% since the “awareness campaigns” began in summer 2013.

5.

What are relevant insights for future Japanese policymaking?
Nations around the globe are responding to the need to achieve greater access to higher
education in the context of fiscal resource constraints by shifting more of the responsibility
for paying college costs on students and their families.

By providing a mechanism forstudents and their families to pay the costs, student loans help to encourage thesocially-optimal level of investment in higher education (Avery & Turner, 2012).
Despite these potential benefits, this review identifies a number of concerns about theuse of student loans in the United States.

While this review also describes various

policies that have been adopted in the U.S. to address these concerns, very few studies
have examined the effects of these policies on student outcomes.

Based on hiscomprehensive review and synthesis of prior research, Heller (2008) concluded that theeffects of student loans on college access are ambiguous.

Dynarski and Scott-Clayton(2013) also observe the absence of rigorous studies on the effects of loans on college
enrollment, performance, or completion.

Little also is known about the effects ofdifferent efforts to improve students’ knowledge of loans or ease the burden of loan
repayment.
The transferability of the insights identified about the U.S. in this paper to Japan islimited by the many differences in the economic, political, historical, and demographic
contexts of the U.S. and Japan, as well as the differences in the higher education systemsof the two nations.

Nonetheless, from this consideration of the concerns about loans andrelated government policies in the U.S., we offer the following suggestions to Japanesepolicymakers:
5.

Consider how the costs of higher education should be shared among relevant
stakeholders and adopt policies that achieve this cost-sharing;

6.

Adopt policies that reduce the need for borrowing, especially for students most at risk
for not completing their degree programs;

7.

Adopt policies that ensure a positive return-on-investment for students who borrow;

57

8.

Construct a student financial aid system that minimizes complexity of the student
financial aid system in general and student loan system in particular;

9.

Adopt policies that ease the financial burden of repayment for borrowers experiencing
financial hardship;

10. Adopt policies that ensure that borrowers have necessary knowledge of loans before
and after entering repayment;
11. Collect data to monitor experiences and outcomes of student loan recipients andengage in a regular program of research to understand the most effective policies andpractices for improving student loan borrowers’ outcomes and experiences.
Implicit in these suggestions is the need for policies that increase access and minimize
risk, especially for students from groups that are historically underrepresented in higher
education and students who are most at risk for not completing a higher education degree.
Income-driven repayment plans appear to be an effective mechanism for reducing therisk of borrowing to students and easing the burden of repayment, especially for
individuals with lower incomes.

Lessons from the U.S. suggest that effective

implementation of income-driven repayment requires government/taxpayer willingness to
pay the related programmatic costs and a reliable mechanism for automatically andseamlessly determining borrowers’ incomes.

Particularly if income-driven repayment is

one of several repayment options, then Japanese policymakers should also consider themost effective approaches for communicating to borrowers about the availability andadvantages of this repayment option.

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Deming, D. J., Goldin, C., Katz, L. F. (2011). The for-profit postsecondary school sector:
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Dougherty, K. J., Jones, S. M., Lahr, H., Natow, R. S., Pheatt, L., & Reddy, V. (2014).
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ANNALS of the American Academy of Political and Social Science, 655, 163-184.
Dynarski, S., & Scott-Clayton, J. (2013). Financial aid policy: Lessons from research. The
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Eaton, C., Dioun, C., Godoy, D. G. S., Goldstein, A., Habinek, J., & Osley-Thomas, R.
(2014). Borrowing against the future: The hidden costs of financing U.S. Higher
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FederalStudent

Aid(2015b).

Federal versus private loans.

Retrievedfromhttps://studentaid.ed.gov/types/loans/federal-vs-private
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59Field, A. (2010). How the banks’ student loan gravy train finally got halted. Retrieved fromhttp://www.dailyfinance.com/2010/03/30/how-the-banks-student-loan-gravy-train-fina
lly-got-halted/
Field, K. (2015a, March 19). House would cut student aid more than budget blueprint
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tudent_Loan_Servicing.aspx
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borrowing and mental health of young adults in the United States. Social Science andMedicine. 124, 85-93.
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62

Chapter 4
Local Student Financial Aid in China:
Backgrounds, Institution, and Information

Jianguo Wei
Associate Researcher, Deputy Director
China Institute for Educational Finance Research,
Peking University

63Chapter 4
Local Student Financial Aid in China:
Backgrounds, Institution, and Information

Jianguo Wei

Student financial aid system have been gradually set up and improved since the end of thelast century, when China began its move towards mass higher education. In this paper,
firstly, I will present the basic facts of China’s higher education, which are thebackgrounds of student financial aid system; secondly, I will introduce the historicaldevelopment of student financial aid system in China; then, I will focus on China’s student
loans schemes; lastly, I will discuss information regarding college costs and student
financial aid.

1.

Basic facts of China’s higher education
1.

The gross enrollment ratio of higher education in China

Figure 13 The Gross Enrollment Ratio of Higher Education in China

64

Over the past 15 years, China’s higher education has achieved great success in enrollment.
China’s higher education began grand expansion in 1999. Before 1999, the grossenrollment ratio of higher education in China is below 10%. The ratio was only 3.5% in
1991. However, the ratio quickly reached 15.00% in 2002, which is the benchmark of themassification stage of higher education (Trow 1973). In 2013, the ratio was 34.5%.
According to the National Medium and Long Term Planning Outline for Education Reformand Development issued by the State Council, the gross enrollment ratio of higher
education will reach 40% in 2020.
2.

Number of HEIs (not including adult education institutions) in China

Figure 14 Number of HEIs in China
Regarding the number of HEIs, it kept relatively stable during the 1980s and 1990s,
the number’s increase was stimulated by the grand expansion which occurred in 1999.
Nowadays, there are over 2400 universities and colleges in China. The majority of themare public institutions, which is about 70% of all institutions. Among the public sector,
there are two kinds of institutions: central HEIs and local HEIs. Regarding the quantity, thelocal HEIs (66.5%) are far more than the central HEIs (4.6%). However, regarding thequality, generally speaking, the central HEIs are better than local ones.

65

In addition, I will talk a little bit about elite HEIs in China. In the 1990s, Chinese
government implemented two important national projects aiming to build up world-classuniversities, which are named by project “985” and project “211”. The universities coveredby these two projects will receive extra financial support from governments. There are 112“211” universities, and 39 “985” universities. All of these elite HEIs are public institutions.
Nowadays, the two projects have been undergoing reform.
3.

Annual enrollment of HEIs in China

Figure 15 Annual Enrollment of HEIs in China
Just like the number of HEIs, annual enrollment of HEIs also kept relatively stable before
1999. Annual enrollment of HEIs in China has increased rapidly since 1999’s grandexpansion. In 1998, there are only about 1 million new students enrolled in HEIs. However,in 2012, this number reached about 7 million. It is worth noting that the majority of thestudents were enrolled in local HEIs. For example, in 2012, about 70% of all students wereenrolled in local HEIs, meanwhile, over 20% were enrolled in private HEIs, only about 7%
were enrolled in central HEIs.

66

4.

Composition of expenditure of China’s HEIs

Source：China’s Yearbook for Education Finance Statistics.

Figure 16 Composition of Expenditure of China’s HEIs
Regarding the composition of expenditure of China’s HEIs, public sector’s share decreased
from about 80% in 1994 to about 40% in 2005, then, the percentage began to gradually
increase and surpass the private share in 2010. In 2011, the public share was about 60%,
meanwhile, the tuition and fees covered about 26% of all expenditure. In addition, thedonation share has been very low since 1994.
It is worth noting that higher education is considered as quasi-public goods in China,
which can produce public benefits and private benefits. Therefore, nowadays, thecost-sharing theory (Johnstone 1986) are widely accepted in China.

2.

Historical development ofstudent financial aid system in China
1.

Phase 1: Before the 1999’s Grand Expansion

China gradually implemented cost-sharing policy at the end of last century. Originally,
higher education was free in China. However, the dual-track tuition policy was
implemented during the 1980s and 1990s.
All students have begun to pay tuition since 1997.
During that time, government gradually implemented some financial aid policies, suchas institutional interest-free loan which differs from student loan program that will bementioned in the latter part of this paper in 1987, subsidy for needy student in 1993,67

work-study program in 1994, and tuition reduction or waiver in 1995.
2.

Phase 2:1999 to 2003

The grand expansion stimulated the development of student financial aid system.
Central HEIs in eight cities adopted a pilot National Student Loan Program in 1999
through Industrial and Commercial Bank of China (ICBC). Central government subsidized
the program by paying loan interest. In year 2000 the pilot extended to a nationwide
program, and the other banks joined ICBC to provide National Student Loan.
To guarantee low-income students could matriculate into college smoothly once they
were admitted, MOE and MOF jointly mandated HEIs to build up a so called “GREEN
CHANNEL” program in 2000, which allowed admitted students from low-income families
to enroll in college first without paying tuition. Once HEIs verified their household
financial status, colleges and universities provided them with appropriate financial aid
packages.
China initiated the National Fellowship Program, which supports low-income andacademically excellent students, in 2002.
3.

Phase 3: 2004 to 2006

The National Student Loan Program met great challenges in 2003. Most commercial banks
were reluctant to distribute student loans because of the huge number of individual loan
service to provide, small amount of loan payment per service, high maintenance cost andrelative high risk of default. MOE, MOF, and other financial agencies mandated a newpolicy in 2004. The new policy made adjustment for the student loan program: introductionof risk compensation fund, extending repayment period.
In 2005, Chinese government reformed its National Fellowship Program. The newprogram had two parts: the National Fellowship program targeted at needy and capablestudent; the National Grant Program intended to support full-time students from extremely
poor families.
4.

Phase 4: 2007 to date

The State Council implemented a new policy (Opinions on Establishing and Improving the
Policies for Subsidizing Students in Universities of Regular Undergraduate Education,
Post-secondary Vocational Schools and Secondary Vocational Schools from Families withFinancial Difficulties) for student financial aid in 2007.
The new policy made significant changes for original student financial aid system,
which was the largest adjustment since 1999. The 2007’s policy is a milestone in thehistory which set the institutional foundation for China’s student financial aid.
The aforementioned new policy mainly regulates the following areas:(a) Enhancing the National Fellowship Program.
Central government is the sole provider of the fund. The program will no longer focus on68needy students. It will be transformed into a merit-aid program with a single goal ofrewarding the most capable students.
(b) Central and local government will co-sponsor the National Incentive Fellowship,
which will reward academically acclaimed students from low-income households.
(c) Enhancing the National Grant program. Central and local government willco-sponsor the National Grant program, which provides financial aid for needy students.
(d) Home-based student loan supplied by China Development Bank will be piloted in
Jiangsu, Hubei, Chongqing, Shaanxi, Gansu.
In addition, there have been many policy adjustments since 2007, especially forstudent loans, such as increasing the maximum amount, extending the repayment period,
etc.

3.

Student loan schemes: HEI-based v. Home-based
Student loan plays a very important role in China’s student financial aid system, which
contributes about 30% of total sum. Generally speaking, there are two kinds of student
loans schemes in China: HEI-based student loan provided by commercial bank and China
Development Bank, Home-based student loan provided by China Development Bank. In
this part, a simple comparison of student loans schemes is made.
Regarding the borrower eligibility, the borrowers of HEI-based student loan are
students. However, the borrowers of home-based student loan are students and theirparents, Students and their parents are co-borrowers.
Regarding the loan size, the maximum amount of student loan each year forundergraduate students was increased from 6000 RMB to 8000 RMB in 2014.
Regarding loan origination, HEIs and commercial banks are responsible for the HEI-based
commercial bank loan, HEIs are mainly responsible for the HEI-based China Development
Bank loan, county-level student financial assistance management center are mainly
responsible for Home-based China Development Bank loan.
Regarding risk sharing, under the circumstance of HEI-based loan, Government and
HEIs each shares half of the risk compensation fund.
Under the circumstance of home-based loans, Government bears the entire risk
compensation fund.
Regarding repayment conditions, originally, the repayment period for HEIs-basedloan is 6 years, meanwhile, the repayment period for home-based loan is 10 years. In 2015,
according to the new policy, the repayment period for all student loans is extended to 20
years.
Regarding the loan collection, both HEIs and commercial banks are responsible forloan collection of HEI-based commercial bank loan, HEIs are responsible for loan

69

collection of HEI-based China Development Bank loan, county-level student financial
assistance centers are responsible for loan collection of Home-based China Development
Bank loan.
In addition, it is worth noting that the majority of student loans are supplied byhome-based student loan scheme nowadays. Regarding the number of recipient, it
contributes over 80%, regarding the total sum of student loans, it contributes over 90%(National Student Financial Aid Center 2013). Home-based student loan scheme is suitablefor China’s current specific circumstances. On the one hand, county-level student
assistance management center uses traditional methods to collect information of rural
students and their parents (co-borrowers) which is very difficult to get in developing
countries and is vital for loan origination and collection, on the other hand, modern internet
payment instrument (i.e. Alipay), which is very convenient for borrowers, is utilized in theloan origination and repayment. The operation of the home-based student loan has beenquite successful till now. In 2012, the default rate is below 3%, which is lower than that ofmany student loans schemes in other countries.

4.

Information regarding college costs and student financial aid
Information is a very important issue in the operation of student financial aid policy. In
2008, we (Loyalka, Prashant, et. al. 2013) conducted a cluster-randomized controlled trial(RCT) to find the causal relationship between information regarding college costs andstudent financial aid and some related outcomes. First or all, based on the baseline survey,
we found that high school students usually overestimate the college costs, and thepercentages of students knowing different types of student financial aid were relatively low,
especially for green channel, only 27.6% knowing it. Regarding the results of the RCT, wefind no evidence that college costs and financial aid information affects college choices.
However, information definitely affects the likelihood that non-admitted students willretake the college entrance exam and the likelihood of receiving certain types of financial
aid.
It is worth noting that our research was conducted several years ago. The situation of
information in China has greatly changed recently. The major measures implemented by
the government and institutions are as follows:•(a) MOE has set up an online platform for national student financial aid information.
(http://xszz.chsi.com.cn/ )• (b) China National Center for Student Financial Aid’s official website has several
columns regarding student financial aid, such as notice and announcement,
policies, Q&A , video and pictures, etc. (http://www.xszz.cee.edu.cn/ )70• (c) Many universities’ Offices of Student Financial Aid also have official websites,
which include all kinds of information regarding student financial aid. (e.g. Peking
University, http://www.sfao.pku.edu.cn/html/index.php )• (d) According to MOE’s policy, students will receive a booklet regarding student
financial aid when they get their letter of admission.

5.

Conclusion
In conclusion, with the introduction of higher education cost-sharing policy and theimplementation of grand expansion policy, China has gradually established its own student
financial aid system. Specifically, 2007’s policy issued by the State Council set up theinstitutional foundation for China’s student financial aid system. Regarding the student
loans schemes, home-based loan scheme plays the leading role in China’s student loans
market. With the introduction of special institutional arrangement of county-level student
assistance management center and co-borrowers and the utilization of modern internet
payment instrument, the operation of the home-based student loan has been quite
successful till now. In addition, regarding the information problem, the situation has
greatly changed recently.

References
Johnstone, D. B. (1986). Sharing the Cost of Higher Education: Student Financial
Assistance in the United Kingdom, the Federal Republic of Germany, France, Sweden
and the United States. New York: The College Board.
Loyalka, Prashant, Song, Yingquan, Wei, Jianguo, Zhong, Weiping, Rozelle, Scott (2013).
Information, College Decisions and Financial Aid: Evidence from a Cluster-randomized
Controlled Trial in China. Economics of Education Review, 36, 26-40.
National Student Financial Aid Center (2013). 2013’ Development Report for China’s
Student Financial Aid. Beijing: National Student Financial Aid Center.
Trow, Martin (1973). Problems in the Transition from Elite to Mass Higher Education.
California: Carnegie Commission on Higher Education.

71

72

Chapter 5
Japan’s Scholarship Programs Including Scholarship Loans:
Overview and issues

Masayuki Shibata
Executive Vice-President and Secretary General
Kyushu University

Any opinions expressed here are those of the author and not those of Kyushu
University

73

1.

Overview of Japan’s scholarship programs
1.

The role of scholarship programs in maintenance costs of university students

The living (maintenance) expenses of Japan’s university students are covered by theirfamily members, mainly parents.

This is contrasted with Britain where students arefinancially supported mainly by scholarships including loans.

According to the survey on

students’ living expenses conducted by Japan Student Services Organization (JASSO) in2012, income derived from scholarships including loans covered only 20% of the expensesof students including those at national, public and private universities.

In comparison to

British students whose scholarships including loans account for over 50%, this figure is
extremely low.

In Japan, the share of income from scholarships including loans isrelatively small for each student.

The number of recipients of scholarships includingloans also remains relatively small in Japan.
Hereafter, “scholarships” will include scholarship loans.

2.6

Family

16.2
20.5

60.8

Scholarships includingloansPart-time jobs

Source: JASSO Survey on university students’ lives, 2012.
http://www.jasso.go.jp/statistics/gakusei_chosa/12.html

Figure 17 Composition of university students’ income in 2012 (%)

74

Table 2

University Students’ Income and their expenses 2012

(1) Full-time undergraduate (Yen)National

PublicPrivateAverage

Family996,200

838,000

1,288,400

1,215,200(60.8%)

Scholarship

350,200

394,200

422,600

408,500(20.5%)

Part-time job

280,800

321,800

332,000

322,600(16.2%)

Others46,30045,60052,40051,000(2.6%)

Total income

1,673,500

1,599,600

2,095,400

1,997,300(100%)

School fees

673,700

682,100

1,319,700

1,175,500(Tuition fees)

504,700

515,200

975,900

871,000

Maintenance890,200

790,100

657,500

704,600

Total expense

1,563,900

1,472,200

1,977,200

1,880,100

(448)

(127)

(1987)

thousandthousandthousandPublicPrivateNumberofstudents(Total2562)

thousand2013(2) Post-graduate master course (Yen)National

Average

Family876,500

655,500

906,300

873,500(45.8%)

Scholarship

524,400

539,500

596,400

551,800(29.0%)

Part-time job

242,500

266,000

331,400

275,200(14.4%)

Others143,100

304,900

292,200

205,400(10.8%)

Total income

1,788,500

1,765,900

2,126,300

1,905,900(100%)

School fees

624,000

676,500

1,082,200

788,100(Tuition fees)

483,000

502,400

808,500

598,500

Maintenance1,013,900

887,400

846,800

947,600

Total expenses

1,637,900

1,563,900

1,929,000

1,735,700

(95)

(11)

(57)

thousandthousandthousandNumberstudents

of

2013

75

(Total163)

thousand(3) Post-graduate Doctor course (Yen)National
FamilyPublicPrivateaverage354,300

278,800

493,400

383,300(14.1%)

Scholarship

1,131,000

892,400

802,500

1,040,900(38.3%)

Part-time job

530,900

572,900

760,700

587,400(21.6%)

Others595,900

1,185,200

930,800

705,700(26.0%)

Total income

2,612,100

2,929,300

2,987,400

2,717,300(100%)

School fees

646,400

731,500

941,800

720,600(Tuition fees)

418,700

465,000

578,800

459,000

Maintenance

1,404,500

1,377,700

1,390,800

1,399,700

Total

2,050,900

2,109,200

2,332,600

2,120,300

(51)

(5)

(18)

thousandthousandthousandexpenses
NumberofStudents(Total74)

thousand2013

Source: JASSO Survey on University students’ lives, 2012.
http://www.jasso.go.jp/statistics/gakusei_chosa/12.html
Ministry of Education, Culture, Sports, Science and technology (MEXT).

2.

Overview of scholarships including loans in Japan
Organizations providing scholarships including loans in Japan are JASSO, local
governments, Universities and non-profit organizations.

Apart from these, some financial

institutions supply loans for education.
Among these, JASSO plays a core role. JASSO is an independent quasi-governmental
agency which was established in 2004 through a merger of four private foundations and theJapan Scholarship Foundation. JASSO provide students of universities, technical colleges,
and higher vocational schools with scholarship loans.
will be 1.41 million.

In 2014, the number of recipients

The total amount of loans is 1 trillion 174.5 billion yen (10.7 billion

US dollars).
The scholarships provided by local governments, universities and foundations are a
mixture of grant and loan styles.

In 2010, the number of recipients is 480 thousand.

The individual scholarship is rather small so that its role in the entire scholarshipprograms is limited.

The amount of scholarships given by universities in Japan is only

45.8 billion yen (0.4 billion US dollars) which is much smaller in comparison to theamount given by their US counterparts.

76

JASSO

480

Local governments,
universities andfoundations

1,230

Figure 18 Number of Recipients by Providers in 2010 (thousand)

141.7
JASSO
Local governments,
universities and foundations

1,011.8

Source: MEXT, “Policy for Students’ Aids”, Committee on the Policy for Students’ Aids,
August 29, 2014, p21.

Figure 19 Amount of scholarships in 2010 (billion yen)
Finally, the factual data of private financial institutions is not available for analysis.
Only the data of Japan Finance Corporation, (which was established by a special law), isavailable.

It provided 110 thousand loans amounting 153 billion yen (1.4 billion US

dollars) in 2012.

These are one-off loans providing high school and university students

with an education fund up to 3 million yen or $27,000.

They are not monthly loans,unlike other schemes.
In the following sections, JASSO’s scholarship loans as a major program in student
aids will be discussed.

3.

JASSO’s scholarship loans
JASSO’s loans are comprised of two types, interest-free and interest-bearing. The criteria
for eligibility for these loans are summarized in Table 3. The interest-free loans are

77

financed by government loans to JASSO and credited repayments.

They are provided tothose students who meet the academic and income criteria (including their families’
income).

The interest-bearing loan scheme is operated under lenient conditions withinterest rate capped at 3%.
Table 3 Outline of JASSO’s scholarship loans
Number of students
Total size of loans

Amount of monthly loans

Academic conditions

Income conditions

Repayment
Threshold income
Interest rate

Interest-free450,000
306.8 billion yen(2.8 billion US$)
including loans from thegovernment
74.4 billion yen(0.7 billion US$)
Options(For a student of a private
university living with his/herfamily)30 thousand yen(273 US$),or
54 thousand yen(491 US$)High school GPA 3.5/5 orhigherUniversity within top 1/3
9.07
millionyenorunder(82,455 US$)(private university,
4 members in family,
living with family)
Within 20 years after
graduation
3million yen(27,273 US$)
Nil

Interest-bearing
960,000
867.7 billion yen(7.9 billion US$)
including treasury investments
loans
859.6 billion yen(7.8 billion US$)
Options
30,50,80,100 or
120 thousand yen(1,091 US$)

and

None in practice12.23 million yen or under(111,182
US$)(private university,
4 members in family,
living with family)
Within 20 years after graduation

Ceiling at 3%(0% while in an university)

Source: JASSO.

The loans are financed by JASSO’s borrowing fiscal loans funds, scholarship loans
from the government, and credited repayments.

From 2007, a new system was introduced.

The lower cost loans from private financial institutions are only used for the period thatstudents are actively enrolled in their universities.

This method is designed to reduce theamount of the interest subsidy from the government, as scholarship loans for students
accrue no interest while students are actively enrolled. These loans from the private sector
will be refinanced by scholarship loans from the government when graduates start their
repayments.

JASSO’s borrowing fiscal loans are not guaranteed by the government.

The term of repayment is 20 years.

The repayment starts 6 months after graduation.

78

The most important function of scholarship loans is to guarantee education
opportunities.

This function is fully realized when loans are secured before entering auniversity. This system is called reserved loans in contrast to selecting recipients among
university students already attending university. Particularly, interest-free loans withstricter conditions than interest-bearing select about 40% of their recipients while they arestill in high school.

Eligibility for loans for post-graduate students is based on bothstudents and their spouses’ income. They are set forth at a lower level than those forundergraduates.

For example, the upper income limit for interest-free loans for masters’

students is 3.89 million yen (35,364 US$). 31.1% of post-graduate students are granted
interest-free loans while only 11% of undergraduates receive such loans.

This difference

can be attributed to the importance of fostering researchers and high-skilled experts at the
post-graduate level.

Since 2004 those post-graduate students with excellent academic

achievements are exempted from repayments.

Apart from these loans, the Japan Society

for the Promotion of Science provides post-graduate students with financial aid. Currently,
4,700 doctoral students are the recipients of both monthly maintenance grants and research
aid.

4.

Issues in JASSO’s scholarship loans programs
1.

Total size of the programs

Table 4 Total size of JASSO’s scholarship loans programs in 2012
Total number ofstudents (Ａ)Interest-free loans(Ｂ)

Interest-bearing
loans (Ｃ)

Total (B＋C)

Undergraduate
Total amount% of recipients

2,560,909

281,806
174.6 billion yen(1.6 billion US$)
A/B
11.0%

695,199600.6 billion yen(5.4billion US$)
C/A
27.1%

977,005775.2 billion yen(7billion US$)(B+C)/A
38.2%

Post-graduates
Total amount% of recipients

210,643

65,45360.8 billion yen(0.6 billion US$)
B/A
31.1%

17,72418.3billion yen(0.16billion US$)
C/A
8.4%

83,17779.1billion yen(0.76billion US$)(B+C)/A
39.5%

Source: JASSO

Table 4 depicts the size of JASSO’s scholarship loans programs in 2012. As
shown in Table 4, the percentage of recipients of JASSO’s scholarship loans islower than those of England’s 80% and America’s 70%. The reason for such low
percentage is explained by Professor Yano (1997) and Professor Kaneko (2005) as
follows. In the post-World War Ⅱeconomic development in Japan, higher
education was regarded as the most important factor in order to join the urban

79

middle class. This led to extremely high motivation among the general population
for advancement to university. In addition to this, household income was evenly
distributed and increased in a steady manner. Furthermore, the bond amongfamily members in Japan is very strong so that parents are ready to sacrifice theirown needs to send their children to universities. The other side of the coin is thatparents have a tendency to avoid the interest-bearing loans in financing theirchildren’s education as they will become a burden on their offspring.11
Figure 20 depicts the trends of the number of recipients of scholarship loans.

1,500,000
1,000,000
500,000

12

2010

8

6

4

1984
86
88
90
92
94
96
98
2000
2

0

Interest-freeInterest-bearing
Total
Source: JASSO.

Figure 20 Trends of the number of recipients in universities and junior colleges(Interest-free and interest-bearing loans)
JASSO’s scholarship loans have been steadily expanding since the 1960s when thenumber of people pursuing higher education started growing.
expansion

However, the pace of

was fairly slow until the conditions for interest-bearing loans were

substantially eased in 1999.

As a result, the number of loans did not catch up with therapid growth of undergraduate students, and thus the percentage of recipients remained
around 10% for many years.
In the 1990s, Japan’s bubble economy burst followed by a long-lasting recession.
11

Motohisa Kaneko, 2005, “Next focal point-Student scholarship and tuition

fees,” IDE Higher Education in the Modern Society, October 2005.
Masakazu Yano, 1997, “Socioeconomics of scholarships,” University andStudents, 388, MEXT.

80

On the other hand, the demand for scholarship loans expanded, as the advancement rate tohigher education and its population increased.
In tandem with this trend, the government was looking for new investment fields for
its fiscal loans funds by reviewing traditional areas such as roads.

Medical and welfare

services and education were identified as new and promising fields.

Thus, during late the1990s and early 2000s, interest-free loans financed by loans from the government failed togrow, while interest-bearing loans funded by treasury investments and loans expanded
substantially.

This trend continued in the following years to make the total number ofrecipients of both interest- free and interest-bearing loans in 2013 reach 3.4 times that in1998.
As a result, the number of loan recipients among under graduate students reached 41%
in 2013.

However, this figure is much lower than those in UK, 80% and the US, 70%.

(Figure 21)

Undergraduate

Post-graduate

70
60
50
40
30
20

11

8

5

2

99

96

93

90

87

84

81

78

75

72

69

0

1966

10

Source: JASSO

Figure 21 Number of recipients among undergraduates and post-graduates
Number of recipients/number of students(％ )The question is if this low percentage will continue in the future or not.
been experiencing a rapidly declining birthrate and an aging population.

Japan hasThis brings

about a massive financial burden on society due to increasing expenses for pensions,nursing care and medical services for the elderly.

It is going to be increasingly difficultfor parents to continue investing in their children’s education instead of preparing for theirown lives in retirement.

It is also pointed out that the income gap among households iswidening under long-lasting sluggish economic growth under which the number ofpart-time jobs are dramatically increasing in comparison to permanent positions. Such81

circumstances will boost the demand for scholarship loans.

In fact, the percentage ofrecipients is substantially increasing in tandem with the expansion of interest-bearing loans.
There must be a strong demand for scholarship loans.
JASSO has to start designing a robust and sustainable scholarship loan system inpreparation for further drastic expansion in the near future. The massive increase inrecipients and decrease in full- time jobs will lead to insecure employment and unstable
income.

The repayment system has to be modified to fit such a situation so that

university students can use the scholarship loans without much fear of debt.

The

income-contingent repayment system adopted by England and others serves as a goodreference.
2.

JASSO’s

income-contingent repayment system

JASSO introduced the income-contingent repayment system which was applied tointerest-free loans in 2012.

Repayments are deferred as long as the annual income

remains below 3 million yen (27,000 US$).

Even after repayment starts, the deference isgiven when the income falls below the threshold again.

Table 5 depicts the differences

between JASSO’s income-contingent repayment system and that of England.
Table 5 Comparison of income-contingent repayment systems
Between JASSO and England
JASSO

EnglandType of loans

Interest-free loans

Amount ofInterest

repayments

equal installments

Threshold for3 million yen￡21,000(3.57 million yen)Interest rate

Nil

Inflation rate ＋0~3%

Written off

Death of recipients

30 years or 65 years old

andTuition loans, Maintenance loans

principal

in(Income－￡21,000)×9%

deferment

Source:Masayuki Kobayashi, Yoshitaka Hamanaka, Liu Wenjun ”Research on the

Advancement to University and Financing of Educational Expenses-Survey on Parents ofHigh school Students 2012” Japanese Association of Higher Education Research, 16th
Conference, March 26, 2013.

The biggest difference is the coverage of loans.

JASSO’s income-contingent

repayment system is applied only to interest-free loans which account for around 20% of
total loans, whereas the English system covers entire loans including both tuition fees andmaintenance loans.
One of the characteristic features in the English system is the adjustable amount of82

repayments calculated as follows:(Income－￡21,000)×9%
This contributes greatly to easing the anxiety of recipients, as all students anticipate
instability in employment and income during their lives.
Furthermore, loans in the English system are written off 30 years after graduation or at
the age of 65.

This is another factor to alleviate the fear of debts.

In order to expand the higher education under the low-level of economic growth inJapan, the loan system has to be made user-friendly via adopting some of the excellent
structures of the English system.
3.

Lack of grant-type scholarships
JASSO’s scholarships are in the form of loans.

JASSO’s predecessor, the Japan

Scholarship Foundation was established in 1943 by a leading group of parliamentary
members.

They emphasized the following points in adopting loan-type scholarships:

1) The financial burden on the government should be minimized.
2) The responsibility of education should be shouldered by parents.
However, the demand for well-educated human resource grew as economic growthestablished its steady trend in the 1960s after the recovery from the post-war turmoil.
Against this backdrop, a special scholarship loan scheme was introduced to exempt
repayments in part.
examination.

This new type of loan was provided to those who were selected by

These selected recipients were granted the entitlement to exemption when

they entered university, thus this system was a de-facto grant under the loan-type scheme
as a whole.
However, due to the recession after the oil-shock in the 1970s followed by thedeterioration of the government fiscal deficit, the volume of the exemption was reduced ,and the system itself was abolished in1984.

Currently, a third of post-graduate students

are granted partial or whole exemption of repayment.
Another issue raised here is debt aversion.

Particularly, those households in lower

income bands tend to give up on sending their children to university, as they have fewer
and limited access to information concerning the merits and outcomes of higher educationand the risks of investment in higher education.
in Economics.

This is an issue of imperfect information

The best way to cope with this issue is grant-type scholarships, targeting

lower income households.

The current financial situation in Japan makes it extremely

difficult to introduce such a new scheme.

However, it is worth introducing via scrapping

other programs in education, as it is the most effective way to preserve social mobility.
4.

Arrearage

83

In JASSO’s scholarship loans, interest and principal are repaid in equal installments over
20 years.

The amount of monthly repayment is automatically deducted from the bankaccount of recipients.

The recipients of scholarship loans are requested to open a bankaccount upon their graduation.

The recipients are also required to register a guarantor anda surety liable jointly, or to participate in the institutional guarantee scheme by paying fees.
The repayment starts 6 months after graduation, and is scheduled to finish in 20 years.
An arrearage charge is calculated on the daily basis amounting to 5% (previously 10%
until 2013) per year.

In case of overdue repayment, JASSO notifies over telephone up to threemonths. Guarantors and sureties are also notified after 2 months over telephone.
Those recipients overdue more than 9 months are noticed of possible legal action
through legal courts. The legal enforcement, (forcible seizure of salary), could be
employed when the overdue repayment exceeds 9 months. If repayments aredelayed for three months or more, the personal information of the loaner shall be
registered with personal credit information organizations to prevent multiple debts.
About 3.5% of new graduates fail to open the required bank accounts to start repayments.
The total collection ratio for newly graduates is 96.5% in monetary terms.
Arrearages are accumulated year by year.

Particularly, the volume of total arrearage

has rapidly grown after the expansion of interest-bearing scholarship loans in 1999.

The

collection ratio of the delayed repayments deteriorates as the period of the delay getslonger. (Table 6, Figure 22)
Table 6

Collections of delayed repayments by period of delay

2012 (100million

yen)
Period of delay

Amount to be collected

Amount actually collected

Ratio (%)

5 years or more

310

25

8.0

4~5 years

66

7

10.0

3~4 years

80

9

11.0

2~3 years

101

11

11.3

1~2 years

120

14

12.1

Less than 1 year

176

52

29.4

Total

852

118

13.8

Current year only

4303

4113

95.6

84

120
100

95.6

80
60
40

29.4

20

11

11.3

12.1

10

8

0
Current Less thanyear
1 year

1～2
years

2～3
years

3～4
years

4～5
years

5 years or
more

Source: JASSO

Figure 22 Collections of delayed repayments by period of delay

2012 (%)

Amounts actually collected/Amounts to be collected
Although the collection ratio for newly graduates remains at a relatively high level,
the huge total amount of accumulated arrearage itself attracts criticism in society.
sustainability of the system of scholarship loans is often questioned.

The

In fact, theaccumulated amount and number of recipients in arrearage has been dramaticallyincreasing. (Figure 23)(Figure 24)(100 million yen)
1000
800
600
400

Source: JASSO

Figure 23 Accumulated amount of arrearage

85

11

9

7

5

3

2001

99

97

95

93

91

89

87

85

83

0

1981

200

(Thousand)Less than 3 months

3 months or more

350
300
250
51

200

66

77

87

97

126 134 133 140 147

107

150
203 211 208 197 194 187
170 183 185 194 200

100
50
0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: MEXT

Figure 24“Policy for Student Aids”

August 29, 2014,

p23.

Accumulated number of recipients in arrearage (individuals)

In 2012, the accumulated amount of arrearage is 92.5 billion yen, 0.8 billion US$, andthe number of recipients in delayed payments is 330 thousands.
has gathered intense attention in the society.

This issue of arrearage

JASSO has been making their utmost efforts

to improve the situation.
The issue is the rapidly increasing costs in dealing with the arrearage, as theaccumulated amount and the number of recipients in arrearage grow.

The value formoney in collecting arrearages has to be scrutinized.
In this connection, the collection system adopted in the English scheme could be agood starting point.

In the system, employers withhold the amount of repayments of theiremployees who are recipients of scholarship loans.

This withholding is done along withtaxation at the source.
In order to eliminate the preventative factor of the expansion of scholarship loans,fundamental restructures in the collecting system at JASSO have to be implemented assoon as possible.

86Chapter 6
Comments:
Issues on Student Financial Assistance Policies in Japan from anInternational Perspective

Yoshitaka Hamanaka
Senior Researcher, Department for Higher Education Research,
National Institute for Educational Policy Research (NIER)

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Chapter 6
Comments:
Issues on Student Financial Assistance Policies in Japan from anInternational Perspective
Yoshitaka Hamanaka

1.

Characteristics of Japan’s scholarship policies
Ø

The major portion of financial assistance provided to students is JASSO’s
scholarship loans.
² As there are no publicly subsidized scholarships (grants) available, some express theview that Japan’s financial assistance system for students is not extensive.
Ø However, from an international perspective, as a “loan,” the burden imposed on
the user is not necessarily very heavy.
• As a principle, the loan is free of interest. (However, recently, the amount ofinterest-bearing loans has surpassed that of interest-free loans.)• Even in the case of an interest-bearing loan, the interest rate is fixed at a low level(the rate is linked to the FILP funding rate, and, if it exceeds 3%, the government
provides a subsidy to cover the interest); no interest is charged while the student
concerned is at school.
• The term of repayment is twenty years.
• Various measures for the extension of the repayment are available.

1.2
Ø
Ø

（1.2
Ø

Characteristics of Japan’s scholarship policies – historical background“Loans” instead of “grants”² Only students facing acute financial difficulties (coming from low-income families)
are eligible.
Why “Loans” instead of “Grants”?
² This is largely due to the difficult post-war fiscal situation.
• By using money recovered from existing loans as a source for new loans, thegovernment’s burden was contained to the utmost extent possible.
² Also, since the establishment of the modern school system in Japan, the concept thatcosts for higher education should be borne by the beneficiary (the responsibility of
the family) has established deep roots.
• The concept of “a levy on the beneficiary” originated largely due to the weak andvulnerable fiscal situation during the early period of modernization in Japan.

Characteristics of Japan’s scholarship policies - historical background）
Under tight fiscal conditions and the principle of the beneficiary pays, to achieve

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Ø

2.

both economic growth and equality of opportunity simultaneously,² Concentrated investments and a low tuition policy in a small number of national
universities.
• Conditions for education (quality) and the capacity to select enrolling students
were secured.
• Achieved “equality of opportunity among students of high ability”(→ the principle of ”the Promotion of Merit”)• Financial assistance provided to students supplemented this policy.
• Both scholarship loans and tuition exemptions were made disproportionately
available to students attending national universities.
Meanwhile, supported by high economic growth, quantitative expansion was left in
the hands of private universities (= the burden of tuition is on the household)
Different conditions in “The Initial Period of Expansion of HE” (in the 1960s),
when other advanced countries expanded higher education through public
expenditure as part of a welfare state policy.

What is the current issue?
ØØThe current financial assistance scheme for students basically follows the
traditional philosophy/framework that was formed around this period.
² Of course, in response to the quantitative expansion of HE, slight adjustments havebeen made (e.g., the introduction of interest-bearing loans (1984), and attempts to
reduce the disparity between the number of recipients entering national universities
and the number of those going to private universities)² The philosophy of “providing support to persons in financial difficulties” under the
principle of “the Promotion of Merit” has not changed.
During the “Second Expansion Period of HE” (1990s~), the gap between theunderlying philosophy of the system and social need gradually widened.
² The meaning of “equality of opportunity” changed with quantitative expansion.
• From “equality of opportunity among students with high abilities” to “securing
the opportunity for higher education according to the level of ability of therespective individual.”

2.1 What is the current issue? - recent trendsØThe discrepancy between the ideal and the reality has been dictated by the
expansion of interest-bearing loans. (1999~)² Academic standards and income restrictions were both extensively relaxed.
² Currently, the ratio between those receiving interest-free loans and those receiving
interest-bearing loans is 4:10.
•
Users have expanded into middle-income households.
The increase in tuition (= increased household burden) is definitely afactor, but there is also the fact that the use of low-interest loans,designed for households facing acute financial difficulties, iseconomically rational.
•
It is hard to define this as “the Promotion of Merit” for students with highabilities.
From the beneficiary-pays principle, doubts have been expressed as to83the necessity of providing substantial support using public funds.

2.2

What is the current issue? - readdressing the philosophyØØ

A disparity in the university enrollment rate exists because of different levels ofhousehold income.
² Students giving up higher education for economic reasons do exist.
² Due to the present knowledge-based society, the demand to move on to higher
education (or post secondary education) will increase in students with mid-level
academic achievements.
The existing scholarship loan system cannot entirely satisfy any of the following aims:
achieving equality of opportunity for low-income households, aiding middle-income
households who have to pay for tuition, and public expenditure for higher education via
support to individuals.
² A scholarship policy that is adaptable to various social needs is required.
² We need to readdress the underlying philosophy and design a concrete system thatis compatible with such a philosophy.

3. Issues
3.1 Issue 1- Introduction of income-contingent repayments
ØØ

The Cabinet decision “Regarding the Outline on Measures to Counter Child
Poverty” was adopted in August 2014.
Currently, we are at the stage of designing a way to implement ICR.
² Referring to examples in various countries, which is one of the purposes of this
symposium.
² Although “ICRs” are adopted in the UK and the US, the concepts underlying these
two systems are completely different.

(A) The United Kingdom
The ICR comes as a set with a pay-later tuition system.
• In principle, everyone uses the income-contingent repayment system.
• After graduating, when the “benefits” of higher education have been accrued, afixed percentage of these “benefits” are collected.
• The underlying concept is that the costs of higher education are borne by society as
a whole but should be partially shared by the “beneficiary”.
(B) The United States
Measures to mitigate excessive loan burdens.
• Applicable to those persons who have selected the ICR option.
• The number of people who select this option is small due to the increase in the total
amount repayable.
(C) In the case of Japan
We assume the new system will basically be similar to that in the US,•
As it is interest-free (or the interest rate is low), the cost of the installment
payments is low and/or if payments are exempted after a certain period, thegovernment’s financial burden will increase.
- The system is not sustainable unless there are people who will be84

•charged higher installment payments than are currently charged- The number of persons choosing the income-linked repayment model
may be limited?
There are not a few persons who hold the following view: if the benefits after
graduation are small, this is due to a lack of effort on the part of the individual
concerned, and/or “people who should not have enrolled are moving on tohigher education” (excessive expansion of higher education)→ What is the situation in other countries?
Ø

Relationship between ICRs and equality of opportunity.
² In Japan, the purpose of the introduction of ICRs is as follows•“easing the future anxieties of students coming from financially distressedbackgrounds, and enabling students to enter school without worries.”•
To counteract the tendency of low-income earners to experience “loanaversion” or “risk aversion.”→Will the introduction of ICRs contribute to the equality of opportunity?
→What is the situation in other countries?
3.2 Issue 2 – The pros and cons of grantsØØAlmost all the political parties in Japan agree on the introduction of grants.
² However, there are no funds available at the moment for these grants.
Issues that need to be cleared in introducing grants.
² Eligibility• Should it be the same as the current loan scholarships? That is, financial
difficulties and superior academic achievements• Even now, most academically superior students advance to universities.

→Will it contribute to achieving equality of opportunity?

Ø• If the criteria are solely limited to financial difficulties, can we attain a social
consensus in Japan where there is a tradition based on the principle of “thePromotion of Merit”.
² What types of costs are eligible for payment• Tuition or cost of living? Or both?
- From a beneficiary-pays perspective, should tuition be borne equally?
- Is it similar to or different from tuition exemption?
² Methodology• No-need-to-pay-back scholarships, or conditional exemption from repayment?
It is quite clear that this is more desirable as a measure for the redistribution ofincome . . .
² Merits and demerits compared to methods other than paid scholarships for higher
education?

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3.3. Issue 3 – Tuition/scholarship policy and the quality of higher education
ØThe situation is the same in each country. It is difficult to meet the increasing costsof HE with public funds. However, the methodology for sharing costs is different
for each country.
(A) United States
The government is inducing cost-sharing by expanding federal loans andintroducing various tax advantages• The quality of education has improved through competition between
universities.
• As a result of an upsurge in tuition, the use of loans has further expanded,and the excessive burden has become a social problem.
• On the other hand, as a result of the expansion of loans, anyone can afford
tuition for now. This results in an expansion in the number of for-profit
universities, leading to the issue of a decline in quality and thus calls forstronger monitoring of quality by the federal government(B) United Kingdom
The burden of the cost of education has moved from institutional subsidies to tuition.
• Based on the assumption of the following scenario; expansion in size
(quota) → resolving excess demand → competition between universities →
improvement in quality• To ensure fair competition, universities must strictly comply with the needfor information disclosure.
(C) China
Problems are likely to erupt if the scale expands further?
(D) Japan
Essentially, the ratio of private funding is large and it is difficult to implement asignificant rise in tuition, so→ excess demand will continue,→ it will not lead to competition between universities and an enhancement in thequality of education.
→ In addition, information disclosure is insufficient.
Ø What is the role of the financial assistance policy for students if one has the aim ofenhancing the quality of higher education?

86

Chapter 7
Conclusion:
Lessons for the reform of student financial assistance policy inJapan

Masayuki Kobayashi
Center for Research and Development of Higher Education
The University of Tokyo

91

Chapter 7
Conclusion:
Lessons for the Reform of Student Financial Assistance Policy inJapan

Masayuki Kobayashi
In this conclusion, I will sum up the lessons for the reform of student financial assistancein Japan and provide policy options considering the suggestions in the previous papers. I
will choose only a few issues that we will have to discuss further if we wish to reform thestudent financial assistance scheme, although there are many issues that we have alreadydiscussed.
We have to note that each country has its societal, cultural, economic, historical, andpolitical background, and differences in education reflect these differences. However, eachcountry faces the same challenge of the reform of higher education, especially that oftuition fees and student financial aid. In this conclusion I will try to focus on the common
tasks and challenges.

1.

Cost sharing in higher education
Obviously it is more difficult for countries to sustain the costs of. higher education withpublic funds, although there are a few exceptions to this, such as the Nordic countries. The
mega-trend of cost sharing has been shifting from public to private, especially from parents
to students. Japan is the leading country in this mega-trend.
However, this shift causes some serious problems. The costs of higher education areshared by households while tuition fees are rising in Japan. This means that the burden of
the costs of higher education has been becoming heavier and heavier, particularly for low
income families. This affects the accessibility and affordability of higher education forthese families.
Besides this, the loan burden and loan aversion are very serious problems in many
countries. Therefore, student financial aid programs have become more important than ever.
On the other hand, the quality and size of higher education should be maintained andenhanced through a mixture of public and private funding. This might lead to a92

misunderstanding about cost sharing if we only think about tuition fees without
considering other factors. In particular, I underline the need to consider the combination oftuition fees and student financial aid when we examine this cost-sharing issue.

2.

Access and affordability
Accessibility and affordability are the most important issues in higher education. Eachgovernment has made substantial efforts to improve these aspects while having to confront
ever rising tuition fees and decreasing public subsidies to higher education. The focus is on
student financial assistance for under-represented groups. Nonetheless, we still findinequality of access to higher education in each country. This means that we need morereform of our student financial assistance schemes.

3.

The reform of student loan programs
In this report, authors discuss the reform of student financial assistance schemes,particularly with regard to income contingent loan repayments (ICRs) and financial
literacy.
The authors of these papers stress that ICR is a device for insurance and for smoothconsumption without heavy credit constraints. They stress that ICRs are effective andequitable when it comes to reducing the risk of borrowing and the need to mitigate theburden of loan repayments, especially for borrowers with low incomes.
We have to consider many issues when we reform the income contingent repayment
scheme in Japan. Here I will focus on only two.
1.

Interest subsidies or interest-free loans

One big issue is the interest rate of the student loan, particularly that of income contingent
loan repayments (ICRs). In his paper, Professor Barr insists that subsidized loan interests
should be abolished. His argument is that these subsidies are not only very expensive but
also that the beneficiaries are mainly middle class. He seems not to care about the fact thatthe amount of interest that borrowers repay is more for borrowers on low incomes because
the repayment period is much longer for them. He argues for making repayment periods a
bit longer.
However, the argument for the reform of student loans in Japan has been going inentirely the opposite direction. We have two types of student loans, that is, interest-freeloans and low-interest loans. The interest-free loan program was established in 1944 andthe low-interest loan program was introduced in 1984. Since 1999, the volume of
low-interest loans has been increasing dramatically, while that of interest free-loans has
been increasing gradually, as was seen in the introduction and in Shibata’s paper. Almost
everyone, the Minister of Education, the members of the Diet, major political parties andresearchers advocate a change from low-interest loans to interest-free loans. The main93

reason is the sum of the interest is much more in the income contingent repayment
program for low income borrowers who have to repay over a longer period. We will now
consider Barr’s argument for the reform of the student loan programs in Japan.
2.

The amount of the loan

Barr insists that the loan should be large enough to make higher education free at the pointof use. Therefore, it should cover not only tuition fees but also the living costs of higher
education. However, most arguments for the reform of student loans in Japan move in the
opposite direction here, too. They argue that we should limit the maximum amount of theloan a student can borrow to prevent over-borrowing. The default rate might be higher,
particularly with ICRs, as the amount of the loan is higher. Barr’s argument is that with
ICRs the amount of the loan makes the repayment period longer but it does not affect themonthly repayment and default rate. We will discuss this issue further with respect to thereform of the student loan scheme in Japan.

4.

The new income contingent repayment plan

Figure 25 The income contingent repayment plan of JASSO interest-free student loanof 2012
The ad hoc committee on the income contingent repayment plan advocated the new ICL
plan March 2016. Figure 25 shows the present repayment plan of JASSO interest-freestudent loan. The amounts of borrowing are decided by the type of HEIs and residence.
The case of Figure 25 is a plan for a undergraduate student attending private university
from home. This plan is called “income contingent,” but, as a matter of fact, it has only
deferment of repayment if the borrower’s income is less than three million yen though the94deferment period is unlimited. Furthermore, this plan is only adapted the borrower’s family
income is less than three million yen at the time of application. Thus, it is a repayment plan
for low income family. The amounts of repayment are not contingent on borrower’s
income.
On the contrary, the new repayment plan is truly “income contingent” as is shown in
Figure 26. The repayment rate is nine percent of the borrower’s taxable income, and thedeferment (maximum ten years) is also adapted when the borrower’s income is less than
three million yen. A borrower can choose whether the present repayment plan or the new
repayment plan by the end of borrowing. This repayment plan does not apply to
low-interest student loan.
.

Figure 26 The new income contingent repayment plan of JASSO interest-free student
loan
It is too early to evaluate this new repayment plan. One thing certain is that theguidance of this new plan is extremely important because a borrower must choose one. We
will continuingly investigate the consequences of this new repayment plan to improve therepayment plan in the future.

5.

The information gap and the early management of financial literacy95

In this report, the authors of each paper deal with the information gap and stress theimportance of early management for providing adequate information and knowledge ofstudent finance issues. Each country has made efforts to improve the financial literacy ofparents and students: e.g., the Widening Participation Program in England, compulsory
guidance for students in the USA, and loan calculators in England, the USA and Japan.
However, the authors all agree that we should facilitate to a greater and greater extent thedissemination of knowledge and information before students enroll in higher education.
They say that, in order to reduce the information gap, as well as providing better
information and knowledge, we have to make student financial assistance simpler,
especially with regard to loan repayment schemes.

6.

Grants or scholarships for undergraduate students
There are few people who do not want to introduce grants for undergraduates in Japan.
However, the financial authority argues that the public finance situation does not allow for
this. We still need to argue our case. To ensure the effective use of public funds, grants
should be well-targeted and effective. The criteria for eligibility for grants and scholarships
are the focus of the discussion; need-based, merit-based, or both, the last being the
traditional criterion for student loans in Japan. If this is done, they will contribute not only
to equality of access but also to the efficient use of public funds. Thus, we will try toacquire the understanding of the taxpayers and the relevant financial authority.

7.

Perspectives
We have been discussing the issues of student financial assistance programs whileconsidering their background. We have found common characteristics among the problems
these programs face: access, cost-sharing in higher education, loans versus grants, ICRs to
improve the situation regarding loan debt and loan aversion, and so on.
Each chapter reveals that each country has been trying to reduce disparities in
educational opportunity in the face of very tight public finances. Furthermore, someJapanese universities and colleges have implemented new policies to lessen the burden on
the household through various means such as grants for undergraduates and/or waiving
tuition fees for students from low-income families. This kind of activity may change thesituation of financial aid in Japan.
The lessons provided by the authors will be very helpful in obtaining plentiful
suggestions for the improvement of tuition fees and student financial aid in Japan as wellas in other countries, particularly for those who are trying to introduce ICR schemes. It is
our hope that these will bring about changes in this area in the near future96

I underline that more evidence is needed concerning the reform of student financial
assistance schemes in Japan. We will collect data and analyze our findings to acquire
evidence. Our research project has provided the results of the new nationwide survey on
and equality in educational opportunities, as we mentioned in our introduction. We havefound that we face a loan aversion problem and a low awareness of student loans.
Simultaneously, we have been surveying educational reforms, particularly policies ontuition fees and student financial aid programs in other countries. These are verysuggestive, and we will continue our comparative studies in order to acquire evidence
about the reform of student financial assistance policy. We hope this report will contributeto efforts for reform.

References
Kobayashi, Masayuki (2008). Equality and Cost-Sharing in Japanese Higher Education, in
Kobayashi, Masayuki (ed.). Worldwide Perspectives of Financial Assistance Policies:
Searching Relevance to Future Policy Reform for Japanese Higher Education, Center for
Research and Development of Higher Education, The University of Tokyo.
Kobayashi, Masayuki (2012). Access and Success in Japanese Higher Education, IAU
Horizons, Vol. 17 No. 2, p. 24, International Association of Universities.
Kobayashi, Masayuki and Wenjun, Liu (2013). Access and Cost-Sharing in JapaneseHigher Education: Tuition and Student Financial Aid Policy, updated in 2012, Center for
Research and Development of Higher Education, The University of Tokyo.

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