PTPTN, in its current form, is not sustainable

The Government pays the interest of the loans. If hypothetically the loans reach the RM1 trillion mark, the amount of interest payment to be paid by the Government will be around 50 to 70 billion Ringgit per annum. For PTPTN to continue playing the roles entrusted to it, financing for the scheme must come from somewhere. And the money comes from our banks and worryingly – our retirement savings in EPF.

Feizrul Nor Nurbi

PTPTN, as the title suggests, is not sustainable.

This is the crux of the debate that happened last Tuesday night, between YB Khairy Jamaluddin and Rafizi Ramli.

Free education, as proposed by Rafizi and Pakatan Rakyat, is a secondary matter, an alternative solution to the problem regarding higher education financing.

Whether free education is the right alternative, it is still open to debate.

But the issue at hand is – PTPTN, in its current form, is not sustainable.

We as Malaysians need to clearly define the matter at hand – it is not that PTPTN is to be abolished to make way for free education, but instead free education is a proposed mechanism to replace the PTPTN which I have said before – is not sustainable.

There is a clear difference between the two. Unfortunately a big number of Malaysians understand the issue from the angle of the former, and not the correct view of the latter.

Revamping, or abolishing the scheme altogether, seems inevitable due to economic dangers that it poses.

There are certain points divulged during the debate that caught my attention more than others – chief of them the point raised by YB Khairy that PTPTN borrows from commercial banks and EPF to lend to the students.

YB Khairy stated, in his defense of PTPTN, that the Government of Malaysia takes up the responsibility of paying the loan’s interest on behalf of PTPTN, proudly declaring that ‘PTPTN got the money for free’.

Here is the crux of the matter – borrowing to do a welfare program, is never wise.

It is well and dandy if the source of money loaned out to the students are from the Government’s budget surpluses.

Even individuals know that it is never wise to borrow money to give to the needy.

If it’s your own money, then it’s fine. Borrowed money? A big no-no.

 

Why is it so?

Let’s consider this scenario.

PTPTN serves to finance the need for higher education for hundreds of thousands of students year after year. The money loaned-out are used chiefly to settle the tuition fees as set by the institution of higher learning enrolled by the student.

TWO main factors that we need to pay close attention on:

ONE – Student intake increases year after year. This is logical since our population is growing. We are not like Japan or even Singapore where reproduction is a national problem. Kudos to Malaysians for that.

TWO – Inflation dictates that the tuition fees will be increasing rather than decreasing. Inflation is good for the economy – in manageable rate, inflation is healthy and encouraged. Deflation, while will lead to a decrease in prices, will also mean a contraction in the economy. That is certainly not what we are aiming for.

With these 2 factors in mind, let’s see what are their impact to PTPTN.

PTPTN will need to cater for an ever increasing number of students year after year. Also PTPTN needs to cater for the increasing tuition fees pushed upwards by inflationary pressures.

When these two factors combine, it will mean one thing – the total amount of loans in monetary terms will keep on increasing, year after year.

It was stated during the debate that for 2011, the amount disbursed was in the region of RM6 billion. Safe to say that in the following years, this amount will continue to grow.

 

How big can it grow to be?

As long as our population is growing and we have inflation and not deflation in our economy.

So basically, unless Malaysians in general get bored of sex and making babies, unless there is – God forbid – catastrophic famine, war or epidemic in epic proportions – our population will continue to grow.

And unless we are in a prolonged recession that causes deflationary pressure to bring our prices down – then the tuition fees will continue to be pricier and pricier.

Rafizi projected that in the year 2020, the debt taken by students from PTPTN will amount to over RM170 billion. Whether the figure is correct or not, certainly an increase is expected, just that the quantum of increase is open to argument.

The debt by the students to PTPTN is also a debt taken by PTPTN from our banks and EPF.

Here is where the main worry lies. For PTPTN to continue playing the roles entrusted to it, financing for the scheme must come from somewhere. And the amount needed to finance this scheme is ever growing. And the money comes from our banks and worryingly – our retirement savings in EPF.

 

Do you now see what I see?

I see a bubble forming.

A bubble in the same breath as the one which brought down the dot com mania back in 2001, also the 2008 housing bubble in the US driven by cheap financing to those who can’t afford the mortgage in the first place.

I can now hear somebody yelling – “Bubble? So what? Just tell the students to pay back the loan-lar! Problem solved”.

Unfortunately, dear sirs, it does not matter whether the students pay back their loans or not, the bubble will still form even if all PTPTN loan recipients pay back the money in full and on schedule. And at the pathetic rate that PTPTN now recoups back its loans, the problem will grow even worse.

Let’s say that we have a 100% repayment rate. The money that PTPTN gets from the student will be then paid back to the financier – the banks and EPF. All is well and dandy – payment made in full and on time, PTPTN a good paymaster, and it proceeds to apply for an even bigger loan to cater for the next batch of student applicants. At this moment, PTPTN is considered ‘low-risk’ due to its excellent repayment record. 

And due to this low-risk status, the financiers see no reason not to approve bigger and bigger loans for PTPTN.

The amount loaned out to PTPTN will grow to be even bigger than the current GDP of Malaysia. It’s just a matter of time; sooner or later it will come to that.

And do remember – the Government pays the interest of the loans. If hypothetically the loans reach the RM1 trillion mark, the amount of interest payment to be paid by the Government will be around 50 to 70 billion Ringgit per annum. This is based on a standard rate of 5% to 7% of loan interest rate.

This is certainly good business for the banks and for EPF too.

 

But what happens if the bubble bursts?

“How can it burst?” you ask. PTPTN is a ‘low risk’ debtor, right?

PTPTN will only continue to be ‘low risk’ as long as the money that it gets from the banks and EPF and loaned out to the students are paid back in full.

Here is the folly of the whole scheme. If a sufficiently significant amount of students default on their loans, then PTPTN will be in trouble. And the trigger for this to happen is so simple – anything that may affect employment opportunities, be it an economic downturn, a foreign-caused economic crisis or even something like a change in government policy.

PTPTN will then be in trouble. It will not be able to pay back the loan that it gets from the banks and EPF.

And when a significant amount like RM1 trillion can’t be recovered, things will not be rosy anymore.

Banks will go under. Those which survive will be hesitant to lend. Supply of money will shrink and businesses will find it hard to get financing to expand or even to operate. The confidence in the whole financial system will be shaken.

And sadder still, our hard earned retirement savings will vanish in a blink of an eye.

Am I scare-mongering? Well if that the case then you might as well put the same label on Professor Nouriel Roubini, an economics professor at New York University, who back in 2006 predicted the US housing crash in 2008.

Back in 2006 everybody called him Doctor Doom; nobody believed him, everybody saw it fit to ridicule him.

Guess who got to say ‘I told you so’, eh?

So ladies and gentlemen, I hope it is clear now that PTPTN, in its current format, could not, should not and must not be allowed to continue.

A revamp is in order.

A more suitable mechanism to manage higher education financing must be found and this should be a priority now, not 10 years or 20 years down the line when it’s already too big to be allowed to fail.

If we need to take a hit, then now is the time. Free education as proposed by Rafizi and Pakatan Rakyat is nothing but an alternative proposed to mitigate the foreseen dangers if the current mechanism is allowed to continue.

Perhaps from wringing our brains to find fault with their proposal, it is best for us to put our heads together and come out with a solution of our own.

We cannot keep the status quo. Change must be made.

PTPTN must go.