Asia’s student-debt time bomb

KUALA LUMPUR — Malaysia’s year-old government, led by Prime Minister Mahathir Mohamad, suddenly finds itself mired in a political scandal, following the online circulation of a sex video involving a Cabinet minister and another man. Weaponised sodomy charges are nothing new in Malaysia, twice resulting in the imprisonment of People’s Justice Party leader Anwar Ibrahim. Unfortunately, the latest drama, like those preceding it, risks obscuring more essential problems.

One of the most pressing issues is that Mahathir’s government inherited a severely strained balance sheet. And part of its fiscal weakness is rooted in the $9.5 billion in outstanding debt owed to the National Higher Education Fund Corp (PTPTN).

Malaysia is not alone in this regard. Fuelled by rising economic prosperity and aspirations, the global higher-education sector boomed during the 1990s and 2000s. Many countries helped to fuel that explosion by liberalising higher education. Fee-charging universities proliferated, to the point that the majority of university students in the Asia-Pacific region now attend private, not public, institutions. Globally, one-third of all tertiary-level students today are enrolled in private institutions.

Unsurprisingly, student-loan debt surged. Almost 12 years after the 1992 launch of its student-loan programme, New Zealand’s outstanding student debt stood at $7 billion. In the United States, that figure has reached $1.5 trillion, triple its level in 2007.

Asian countries with high tertiary-education participation rates have proved particularly vulnerable to this trend. In South Korea, where 90 per cent of young people pursue higher education, nearly 81 per cent of which is private, education debt in 2013 grew by 12 per cent, or twice the pace of consumer debt. In Japan, where 76 per cent of high-school graduates pursue tertiary education, over 78 per cent of them at private institutions, high tuitions and loan-only financing exacerbate the debt burden.

But there is more to the story than privatisation and rising tuition fees. After all, the wealthy Scandinavian countries are also facing rising student-loan debts, despite offering free tuition. In Sweden, some 70 per cent of students leave university with an average debt of about $20,000, compared to $37,000 in the US.

In many Asian countries, the surge in university enrollment in the last few decades overwhelmed education systems, causing the quality of instruction to decline and leaving graduates poorly equipped for the labour market. Graduates’ employment prospects were further undermined in some countries by demographic shifts, specifically, growing working-age populations, and unfavourable economic conditions, which led to jobless growth. The result is a lot of low-quality employment, widespread unemployment and many graduates who are struggling to repay their loans. India’s double-digit youth-unemployment rate lies at the heart of its student-loan debt problem.

In Malaysia, approximately 28 per cent of bachelor degree-holders were unemployed in 2015. Many others had jobs that barely paid enough to survive: Nearly 50 per cent of working adults in Kuala Lumpur earn far below the central bank’s official living wage. This has forced a large share of graduates to default not only on their student loans, 51 per cent of borrowers are not making the required payments, but also on other debts, including credit-card debt and personal loans. Debtors aged 25-44 constituted almost 60 per cent of the bankruptcy cases reported from 2013 to August 2017.

The good news is that Malaysia’s government is taking action to address its student-loan problem. In its 2019 budget, the finance ministry introduced an income-contingent loan scheme that closely resembles the income-based payroll-deduction programmes in Australia and the United Kingdom.

According to Malaysia’s system, borrowers earning more than RM1,000 monthly can have between 2 per cent and 15 per cent of their salary automatically channelled towards loan payments. This is a promising short-term solution; but if wages remain depressed and living costs continue to rise, income deductions may not be economically feasible.

PTPTN will also allow borrowers earning less than RM4,000 per month to defer repayment, and waive all remaining payments for the 350 borrowers over age 60 who are earning less than RM4,000. Finally, a tax break will be introduced benefiting firms that assist employees with student-loan repayment, though it is unclear how this will affect employers’ behaviour, given that up to 36 per cent of new graduates in Malaysia quit their jobs within one year.

If Malaysia is to overcome its student-loan arrears, it will need to do more. For starters, it should change loan-disbursement criteria, so that a larger share of student costs is covered by grants and scholarships.

Malaysia should also take on board lessons from developed countries. In Germany, for example, parents are required to support their children financially, even during post-secondary education; in June 2016, only 18 per cent of German students were managing student-loan debt. It also helps that student loans are interest-free, borrowers get a five-year break before repayment begins, and high-performing students are rewarded with partial debt write-offs.

Given higher education’s critical role in supporting competitiveness and prosperity, policymakers, especially in transition economies like Malaysia, India and China, should encourage participation. But they can hardly afford to allow student-loan debt to continue to snowball. After all, it was a student-loan crisis that triggered the massive protests that nearly brought down Chile’s government in 2011.

The goal must be to strike a balance between GDP and wage growth and growth in higher education. At the same time, governments must ensure that students are receiving high-quality educations that meet the needs of today’s labour market and protect graduates against technological unemployment in the longer term. Creating a sufficient number of high-quality jobs for degree-holders is, of course, vital.

It is a tall order. But governments like Malaysia’s must fill it if they want to avoid even higher youth unemployment, a heavier burden of debt arrears, and the risk of political unrest.

M Niaz Asadullah is Professor of Development Economics at the University of Malaya in Kuala Lumpur, and head of the Southeast Asia cluster of the Global Labour Organisation(GLO). Copyright: Project Syndicate, 2019. 
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