Looming student loan crisis for Malaysia?
Dr Chow Yong Neng, The Ant Daily
Malaysia’s outstanding student loan comes close to RM50 billion this year, an amount that represents over 9% of the national debt. Higher education is expensive and it’s necessary for the government to extend adequate support to build human capital; but is the gargantuan amount a financial time bomb?
An analysis of the statistics on outstanding loans, the rate of repayment and even the ability to pay indicates that Malaysia could well be heading for a student loan crisis and such a situation will squeeze the amount of loans available to new students.
But just how bad is the situation? For an answer, let’s look at what is happening in the United States, which also gives out student loans.
In the US, outstanding student loans total US$1.1 trillion (RM3.49 trillion), which is equivalent to about 6% of its national debt. Already, financial experts in the US are predicting that this would trigger a financial crisis to the scale of the sub-prime mortgage crisis of 2008. That crisis was due to uncontrolled lending for properties, even to people who could ill-afford them.
In the third quarter of 2013, the share of loans delinquent 90 days or more rose to 11.8%, according to the Federal Reserve Bank of New York. Its president William Dudley said last November that the “very rapid rise in student loan debt over the last few years” can “actually have some pretty significant consequences to the economic outlook”.
“People can have trouble with the student loan debt burden – unable to buy cars, unable to buy homes – and so it can really delay the cycle.”
The problems faced by the US are similar to what Malaysia is facing, perhaps even more so in some respects. For one, 40% of graduates are unemployment or underemployed, and without jobs, these young people cannot pay their loans. Those who do, probably get help from their parents.
Outstanding student loans represent the total amount of loan already disbursed to borrowers. This figure includes bad debts or loans in which borrowers have defaulted on their repayments. A large amount of outstanding loan coupled with a high default rate by borrowers is a clear recipe for a loan crisis.
In the US, 6.8 million out of a total of 37 million borrowers with outstanding student loans are defaulters. This means 18.4% of borrowers had defaulted to the tune of about US$96 billion (RM304.2 billion).
Compared with the US figures, the Malaysian study loan scheme’s (run by the National Higher Education Fund Corporation or PTPTN) loans in default were quoted to be as high as 19%. This indicates that, in terms of proportions, the PTPTN is in the same financial predicament as its US counterpart.
The Heat had contacted PTPTN chief executive officer Agos Cholan on this issue some weeks ago, but has been told that he does not have any comments.
Industry observers say PTPTN simply cannot be expected to keep on dishing out student loans with a dismal loan recovery performance. This is because it needs at least RM5 billion each year to satisfy the needs of borrowers – both existing student borrowers who are still studying and the new borrowers getting into tertiary institutions for the first time.
However, the best loan recovery performance of PTPTN to date was in 2013, at only RM1.2 billion. This means the amount of outstanding loan will snowball every year by at least RM3.8 billion. This figure will be larger if we factor in the amount of loans in default.
As such, if there is any reduction in the injection of new funds to PTPTN, new students or even existing borrowers who are still studying will bear the brunt of the impact. It was reported recently that this year, some 50,000 students may not be able to secure any funding because of the 183,000 PTPTN loan defaulters who collectively owed about RM1.3 billion. This is a sure sign that things are not well at PTPTN.
Observers say the entire PTPTN system is now like a water jug with many holes near its base which are getting larger. “No matter how much water you pour in, it will never be enough to fill the jug, unless the holes are plugged,” an observer says.
With all these local and international indicators, one cannot help but surmise that there is indeed a looming PTPTN loan crisis in the same dimension as that of the US. The sooner every stakeholder recognises this as a pressing issue, the faster hard decisions can be taken to alleviate or at least lessen the social impact, especially on the lower income segment of the population. Student loans must continue, but they must be sustainable.
A PTPTN loan crisis may cause a tightening of the rules, especially the eligibility criteria for borrowers. A squeeze on funding source of PTPTN, coupled with high default rate and relatively low repayment collection, may also curtail the number of for-profit institutions and the type of study programmes that qualify for PTPTN loan. For example, the tightening of the funding rules regarding nursing programmes a few years ago badly affected the smaller private nursing colleges.
The US Department of Education (USDE) imposed a cap on the percentage of students in each programme in the for-profit institutions that can receive its funding. In recent weeks, it was reported that the loss or just a delay in disbursement by USDE of study loans to colleges resulted in the collapse of one for-profit education group with three others in precarious financial situations.
“We may see the same scenario in Malaysia. In the end, it may be the students at these institutions who will have to face the consequences. Officials in the Ministry of Education would have their hands full in containing this contagion effect and at the same time placing students from collapsed institutions to other colleges or universities,” said a source.
For public institutions of higher learning (IPTA), PTPTN could also impose a stricter mean-tested criteria to disqualify a larger number of borrowers to ensure that only students from low income families are eligible for PTPTN loans. PTPTN may also limit the amount of funds available to borrowers to their tuition fees only, forcing many IPTA students to turn to their families to pay for their living expenses. This would have the effect of limiting access to IPTA for students caught in this dilemma, especially those from the lowest income group.
In researching this topic, The Heat detected some discrepancies in the figures relating to PTPTN loans that have been reported in the press at various times.
In 2013, the total number of borrowers who had defaulted on their PTPTN loans was reported as 412,245. By 2014, this figure has dramatically dropped to 183,000.
As of this year, there are 1.24 million PTPTN borrowers, of which 956,018 are actively repaying their loans. A quick calculation shows that there are 100,982 borrowers who are unaccounted for and seemed to have disappeared as we moved from 2013 to 2014.
PTPTN should perhaps explain what happened to the loans owed by these “missing” 100,000 borrowers. If one assumes that each “missing” borrower owes just RM20,000, PTPTN has over RM2 billion of its funds unaccounted for.
Perhaps of more significance is the drastic fall – of around 229,245 borrowers – in defaulters from last year to this year, as well as the status of their loan repayment. If each of these defaulters owed just RM20,000 and everyone had paid up in full, PTPTN should have reported an additional RM4–5 billion collection for 2013 from this group.
If, on the other hand, these defaulters had been “rehabilitated” and their loan repayments were given a tenure of 10 years, then PTPTN should have reported around RM0.5 billion extra collection for 2013, which again did not happen.
These two large discrepancies together can account for close to RM7 billion of PTPTN’s fund that has been unaccounted for, which is enough to cover PTPTN’s current shortfall of RM1.3 billion for at least five years.
This article was first published in the Aug 23, 2014 issue of The Heat
