Student Loan Reform Can Help Shape Japan’s New Capitalism

Visiting Fellow, RIETI

Professor of Economics at The Australian National University and the architect of the Australian higher education financing system

As part of a fairer and more efficient new capitalism for Japan, Prime Minister Fumio Kishida has proposed that Japan adopt an Australian-style income-contingent student loan system (or Japanese Higher Education Contribution Scheme, J-HECS) to fund university tuition.

Most countries use student loans to assist poor people to enrol in university, and this is what happens now in Japan with the JASSO scholarships that involve in part the incurring of debts. Unfortunately, these debts have to be repaid even when borrowers do not have personal incomes that are high enough to afford repayments.

Consequently, student loan borrowers in Japan usually have to rely on family members to repay their loans, or they face the prospect of default. Defaulting is very problematic for borrowers because it means that their credit ratings are damaged, and thus future borrowings are put in jeopardy. With defaults, the costs of unpaid loans are picked up by the government, meaning the taxpayer.

In contrast are Type-1 JASSO scholarships that help many students from lower income families access university with repayments that can depend on future income. But the system is very complex, limited in coverage and could be significantly improved.

The Australian system has been operating successfully since 1989 and has performed so well that it has been copied in England, New Zealand, Wales, Hungary and Colombia, and is now under consideration in the United States, Brazil, Malaysia and other countries with systems like Japan’s.

Japan’s current scholarship system differs from the Australian model in important ways. Australian students cannot incur a default on their student loans because they are not required to repay when they are not earning. The Australian system is much simpler and cheaper to administer and is available to all students entering university.

The income-contingent loan system is based on a simple but powerful concept: students enter university at little-to-no immediate cost and pay off their tuition later, but only if and when they are earning incomes that are above a prescribed minimum threshold. Under the current income-contingent proposal for Japan, university graduates earning below 3,000,000 yen a year would not make any repayments at that time. If over their lifetimes graduates don’t earn above this amount per year - for whatever reason – then they will not be required to repay any of the debt. This actually happens with respect to about 15% of the Australian debt.

This very straightforward feature of an income-contingent loan system has profound implications for borrowers. The largest implication is that when times are financially hard, no repayments are required; thus, a period of unemployment, for example, is of no concern with respect to the loan repayment. As well, there is no need for a debtor who is struggling financially to lean on family members to repay on their behalf.

Importantly, there can be no defaults in such a system, and therefore no credit reputation losses or anxiety associated with loan repayment difficulties. And because debtors stay in the system, they can provide future loan repayments, reducing the burden of taxpayers which is very good for the government.

Thus, an income-contingent loan scheme effectively insures against loan repayment hardships and default. Under the proposed J-HECS, if a student graduates in the middle of a recession (or during a pandemic when the labour market is fragile) and cannot find work, or takes time out of the workforce to care for a child or an aged parent at any time, there are no adverse loan repayment consequences.

Mr Kishida’s suggestion of the adoption of J-HECS is based on the notion that university students should pay their tuition when they can afford to do so. Many parents cannot afford their children’s university tuition and it is understandable that a large number of students have difficulty repaying scholarship loans. But all of this is avoided with an income-contingent loan and, as the Australian, New Zealand and United Kingdom experience has shown, university systems based on this system are easy to sustain and grow, in a way that increases access for prospective students who are poor. It can be argued that such a scheme would empower prospective Japanese students and shift the responsibility for funding higher education away from parents towards individuals but in a way that is not a burden for them.

There is evidence that many prospective university students in Japan are choosing not to enrol because they cannot afford to or because of worries about not being able to repay loans when they might experience low incomes in the future. In Australia, New Zealand and the United Kingdom, prospective students do not have these worries.

Currently 34% of all students receive a JASSO scholarship and a MEXT survey has revealed that 20-30% of these were worried about their future ability to repay a student loan, with the proportions of those from families with incomes less than 8.5 million yen a year being most concerned about this issue.

Most countries with an income-contingent loan scheme make loans available to all students entering university, and this universality is an important feature of the system. A student’s career success is correlated with the success of their parents but not always, and not all students from well-off families will have career success. The financing of higher education can be a tool that facilitates social mobility. But this doesn’t mean that all students are required to take out the loan; parents can choose to pay the tuition for their children upfront at enrolment — in Australia around 20 per cent choose this option — because they have the money and do not want their children to incur the forward liability. In any event, many parents who are used to the idea of paying for private schooling will likely continue to pay for their children’s university education.

There are interesting features of an income-contingent loan system that need to be addressed. One is that the government can encourage up-front or faster repayment, by employing measures such as charging an interest rate on the debt. Other design features of higher education financing that enhance equity and efficiency can be used to complement the proposed scheme. They include grants for poorer students to cover living costs or extension of the scheme to cover some living expenses as well as tuition fees.

In addition, an income-contingent loan scheme can be designed to fully pay for itself, although in most countries there are subsidies. Choices would need to be made concerning interest rates, first income thresholds of repayment, and other details. All these outcomes depend on the design features and are calibrated based on specific circumstances and differ by country; what they might look like for Japan is a matter for policy decision.

It is important to remember that there is always uncertainty about people’s future circumstances. This seems to be particularly true in Japan as important reforms are being undertaken involving the movement away from the lifetime employment system and other rigidities. The critical point is that income-contingent loan systems will assist students and graduates to handle unanticipated adversity, including that associated with major unexpected shocks such as from COVID-19. Australian, UK and New Zealand graduates do not have to worry about any hardships involved in loan repayment and this is currently not the case for Japanese graduates.

The Japanese higher education financing system can be improved substantially and, as has been shown in other countries, without radical transformation.
J-HECS will increase access to university education, diminish the effects of unanticipated financial hardship, promote equity, and make the funding of Japanese higher education more sustainable. Rarely are there reforms like this that see no losers: students, households, universities and the government budget will all be better off.

Prime Minister Kishida’s student loan reform proposal is fairer than the current system, and it is also equitable and efficient. It is an appropriate centrepiece of Japan’s policy agenda and fits comfortably with the Prime Minister’s agenda of a fairer and more efficient new capitalism for Japan.

Shiro Armstrong is Director of the Australia–Japan Research Centre at the Australian National University. Bruce Chapman is Professor of Economics at The Australian National University and the architect of the Australian higher education financing system.

>> Original text in Japanese

* English text provided by the authors.

July 27, 2022 Nihon Keizai Shimbun

August 15, 2022

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