Governments usually, and often quite correctly, come in for severe stick for lacking joined-up thinking.
In that regard, it is quite pleasant to see the initiative from the Department of Social Protection on money lenders. Linking repayment to credit union loans to welfare payments allows low-risk lending and therefore low interest rates.
Would it that similar joined-up thinking pervaded the issue of student loans? Following the Cassells’ report the landscape on higher education funding has become clearer. With it, and the appointment of a more business and teaching-orientated Higher Education Authority, it is clear that the political thrust is to make higher education more of a commodity, at both the input and output side.
Students will pay and employers will hire, the inference being that over time those areas that our market orientated overlords deem frivolous (medieval history, perhaps) will wither on the funding vine, as institutions cut their gown to measure up to the demands of the market. The Cassells’ report is very stark on the need, regardless of any other considerations, for increased State spending on higher education.
The mood music from the State is that an income-contingent loans approach, whereby fees will be paid in large part by a loan whose repayment is linked in some way to income levels, will be chosen. Regardless, we need to ask some hard questions. To be fair, the report acknowledges that much practical work needs to be done on any income-contingent loan scheme. Let’s pose some of these questions.
First, who will administer the loans? Will it be the existing credit institutions or a new government quango? Credit outstanding to the household sector stands at around €86 billion. Some €11bn of this credit mountain is accounted for by personal loans. Irish households, as documented by the Central Bank, are still under pressure following the financial collapse. Debt-to-income ratios are still above 150%.
This is not a good place to be if we are to seek to have households take up loans of €20,000 to €25,000. When we consider that the option to pay fees upfront will remain, the reality is that the loans will be loaded towards those with the least security.
Will banks lend to them? Would you as a banker lend to a client with the following characteristics: They may not complete the purchase of the asset (drop out of college); they may not be in the jurisdiction to allow you to enforce payment (emigration); there is no certainty that they will be in a position to repay; and there is uncertainty over security; there is worldwide evidence of potentially high delinquency in this loan type (there is an implicit default rate of 45% in the UK).
Other banking type questions abound. What about credit scoring for example? If parents do not have good credit scores, will the student be denied the opportunity to take out a loan? What provisions will be made for lifetime events, such as maternity leave or redundancy? Will loans to female students or to students not studying law, commerce and medicine, be charged higher rates to reflect the increased credit risk?
An income contingent loans system has a hoard of devilish details. There is no evidence, which is not to say it does not exist, that serious engagement with the financial services industry, the Central Bank, or the higher education sector has taken place on the administration of this.
There is no evidence whatsoever that Irish banks would be in the slightest bit interested in getting into the market.
Richard Bruton could do worse than have a coffee with Leo Varadkar and learn about joined-up thinking.
Brian Lucey is professor of finance at the School of Business, TCD.