My article entitled “Looming student loan crisis” was published on August 23, 2014 in the now defunct print weekly, The Heat. An edited version of the same article also appeared recently in Theantdaily which was also syndicated by Malaysia Today.

The idea for this article came to me in late June 2014 when I read about the news related to the National Higher Education Fund Corporation (PTPTN), especially related to defaulters and the fact that 50,000 new applicants to PTPTN loans may be turned down due to the lack of fund because of the high rate of defaults.

The first version of my article was deemed to be too “academic” with too many facts and figures and hence I went back to the drawing board to work on the second version which was accepted for publication. I have reviewed and edited the first version which is published here. I shall leave it to the wisdom of my readers to judge if this version (which differs substantially from the one published in The Heat) provides a deeper analysis of the issue of student loan crisis in Malaysia and its analogy with the same issue in the USA. 

In November 2014, PTPTN announced a drastic reduction of loan amount to new applicants which trimmed 5% off the maximum loan quantum for borrowers from public institutions of higher learning but levied a massive 15% reduction in the maximum amount of loan for those studying in private institutions. The mean-testing criteria have also been tightened up further. These proved that my prediction in August 2014 was right on the bull’s eye!

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Malaysia’s looming student loan crisis

In 2012, USA’s outstanding student loan shot over the psychologically important US$1.0 trillion mark. In March 2014, US News reported that this figure has breached US$1.1 trillion. This is significant because by 2012, the total amount owed by United States’s student loan borrowers had exceeded the country’s citizens total credit card debt. Many financial experts are now saying that the US student loan crisis is getting to the dimension of the sub-prime mortgage crisis of 2008. With a total of over 37 million borrowers holding outstanding student loans, 6.8 million (or 18.4%) of whom being defaulters who collectively account for US$95.9 billion it is no wonder that alarm bells are ringing in the USA.

	Table 1: Comparison of student loan data between Malaysia and the USA
		Malaysia	USA
1	Total amount of student loan disbursed (1997 to 2014)	RM54,510,000,000	N/A
2	Total amount of outstanding student loan (2014)	RM49,390,000,000	$1,100,000,000,000
3	Amount of student loan in default	RM1,300,000,000	$95,900,000,000
4	% of total loan in default [(No. 5 / No. 4)*100%]	2.63%	8.72%
5	Total number of borrowers (1997/2013)	2,390,000	N/A
6	Total number of borrowers still with outstanding loan (2013)	1,240,000	37,000,000
7	No. of defaulters (2014)	183,000	6,800,000
8	% of borrowers who defaulted (2014) [(No. 7/ No. 6)*100%]	14.8%	18.4%
9	Underemployment rate of graduates	40%	44%
10	Repayment rate (2012) (RM7.83 billion due, RM3.48 collected)	49.07%	N/A
11	Amount of total loan recovered (Mar 2014)	RM5,120,000,000	N/A
12	Repayment collected (2011)	RM737,000,000	N/A
13	Repayment collected (2012)	RM800,470,000	N/A
14	Repayment collected (2013)	RM1,200,000,000	N/A
15	Average debt owed per defaulter (No. 3 / No. 7)	RM7,104	$14,103
16	Average amount of loan taken by each borrower (No. 1 / No. 5) for Malaysia; (No. 2 / No. 6) for USA	RM22,808	$29,730
17	Total National Debt (July 2014)	RM543,236,000,000	$17,806,000,000,000
18	% of PTPTN outstanding loan as national debt [(No. 2 / No. 17)*100%]	9.09%	6.18%

If we take a look at the statistics for Malaysia’s National Higher Education Fund Corporation (PTPTN) loans and compared these with the equivalents in the USA (Table 1), there are worrying indications that Malaysia is heading the same path as the USA towards student loan crisis. Between 1997 and 2013, PTPTN had provided RM54.51 billion loan to 2.39 million borrowers. To put things into perspective, the total amount of outstanding PTPTN loan currently is around RM49.39 billion and every year PTPTN disburses around RM5.0 billion to over 200,000 borrowers. The best year of loan repayment that PTPTN has recorded was 2013 at RM1.2 billion. In simple arithmetic, discounting defaulting loans, the total outstanding PTPTN loan will grow at least RM3.8 billion each year. In comparison, the dividend paid by Petronas to the Malaysian Government has been around RM30.0 billion each year (for 2013 it paid RM27.0 billion). Thus what is owed to PTPTN is about RM20.0 billion more than what the Government of Malaysia receives each year from Petronas.

The average amount owed by undergraduate borrowers in Malaysia, at RM22,808 is comparable to the USA’s figure of US$29,400 if one takes into consideration of the much lower cost of higher education in Malaysia.

	Table 2: Statistics of PTPTN Borrowers: the unexplained reduction in numbers
	Item	Number
1	Total number of borrowers (between 1997/2013)	2,390,000
2	Total number of borrowers still with outstanding loan in 2014	1,240,000
3	Number of borrowers who have settled their loans (based on calculation: No. 1 minus No. 2)	1,150,000
4	No. of defaulters (2013)	412,245
5	No. of defaulters (2014)	183,000
6	Reduction of defaulters between 2013 & 2014 (No. 4 minus No. 5)	229,245
7	Number of borrowers actively servicing their loans (2014)	956,018
8	Number of borrowers unaccounted for in 2014 (after deducting no. of known defaulters, active borrowers from total no. of borrowers with outstanding loans) (No. 2 minus No. 5 minus No.7)	100,982
9	Amount of loan repaid by borrowers in 2013	RM1,200,000,000
10	Total amount of loan recovered (up to 2014)	RM5,120,000,000
11	Amount of loan attributed to the reduction in number of defaulter between 2013 & 2014, assuming the average owed is the same for the 2014 defaulters, RM7,104. (No. 6 * RM7,104)	RM1,628,516,393
12	Estimated amount owed by the unaccounted borrowers, assuming the average owed is the same for the 2014 defaulters, RM7,104 (No. 8 * RM7,104)	RM717,358,470
13	Total amount of loan from unaccounted borrowers (based on average default amount per defaulter in 2014) (No. 11 + No. 12)	RM2,345,874,863
14	Amount of loan attributed to the reduction in number of defaulter between 2013 & 2014, assuming the average owed iby individual borrowers in 2014, RM22,808. (No. 6 * RM22,808)	RM5,228,512,531
15	Estimated amount owed by the unaccounted borrowers, assuming the average owed by individual borrowers in 2014, RM22,808. (No. 8 * RM22,808)	RM2,303,150,134
16	Total amount of loan from unaccounted borrowers (based on average owed per borrower in 2014) (No. 14 + No. 15)	RM7,531,662,665

With 14.8% (or 183,000) of the 1.24 PTPTN borrowers holding outstanding loan being defaulters (a higher figure of 19% was reported recently), the default rate is fast approaching the US level. Although only 2.63% of PTPTN’s outstanding loans (or RM1.3 billion) are in default, which is about three times less than that of the USA (at 8.72%) the confusing data provided by the relevant authorities in Malaysia at different times points to a possibility of a much higher default figure (as shown in Table 2). Based on data released to the press in April 2014, there was a dramatic reduction in the number of defaulters from 412,245 in 2013 to 183,000 in 2014, a staggering fall of 229,245 borrowers. No explanation has been given to this fall in defaulters. Basing on the average amount owed by defaulters in 2014 of RM7,104, these 229,245 “rehabilitated” borrowers should account for around RM1.63 billion of outstanding loan and the collected amount (assuming that each borrower opted for the 10 years tenure, excluding interest) should be at least RM163 million. If we base our calculation on the average amount owed by a borrower in 2014 of RM22,808, these figures shall change to RM5.23 billion and RM523 million respectively.

Accordingly, there is also another discrepancy in the figures given relating to the number of borrowers actively servicing their loans. In April 2014, it was revealed that there were 956,018 borrowers active in repaying their PTPTN loans and the total number of borrowers with outstanding loans was given as 1.24 million. If we take away from this 1.24 million people the number of defaulters and the recorded number of borrowers actively repaying, there are strikingly 100,982 borrowers unaccounted for. Granted some of these people could have been the top students with first class honours degrees whose loan have been converted to scholarships, in reality producing over 100,000 first class honours graduates who are also borrowers in one year is stretching one’s imagination a bit too far. These 100,982 unaccounted borrowers could be responsible for between RM717 million to RM2.30 billion of loan, if we assume they owe an average of between RM7,104 to RM22,808 (based on the borrowers data for 2014 in Table 1).

Hence the total unaccounted borrowers collectively could owe PTPTN between RM2.35 billion to RM7.53 billion, either of which is a very huge number that dwarf the loan repayment collected in 2013 of RM1.2 billion. Somehow this fact has escaped the attention of the Auditor General office which has uncovered system problems in PTPTN but this alone could not explain the huge number of borrowers unaccounted for.

The amount of student loan owed and the default rate are tied fully to the employment status of the borrowers. In the USA, it was estimated that around 44% of graduates are underemployed which means that they are not in jobs that are relevant to their training and thus not earning sufficiently. In Malaysia, the figure of 40% underemployment has been given for fresh graduates. Hence being underemployed and therefore not earning one’s full potential is the most crucial factor leading to student loan default. Will this lower pay affect the repayment of PTPTN loans? Will this be the trigger to higher level of PTPTN loan default?

PTPTN will need at least RM5.0 billion per year to cover the loan demand of Malaysian students. Assuming that the collection of repayment stays at least RM1.2 billion as per 2013 data, and the default amount stays at 2014 level of RM1.3 billion, the RM5.0 billion will not be enough to cover the needs of new students. Will we see a cap to the amount of PTPTN loans?*  Will the private higher education sector bear the brunt of the cut in PTPTN loan funding? How will the private institutions, especially those with high reliance on PTPTN funding for their students fare?

The percentage of national debt accounted for by student loan debt is about 6.18% for the USA. For Malaysia, the figure is about 9.09% of total national debt. Thus if the USA, at 6.18% of national debt is close to having a financial crisis, how will Malaysia fare with closer to 10% of national debt accounted for by outstanding PTPTN loan?

With all these indicators, one cannot help but surmise that there is indeed a looming PTPTN loan crisis in the same dimension as that of the USA. The sooner that every stakeholder recognizes this as a pressing issue, the faster can a plethora of solutions be implemented.

*This article was written in mid July 2014. In fact in early November 2014, PTPTN has announced a 5% reduction in loan amount for borrowers from public institutions of higher learning while their private institutions counterparts have to endure a massive 15% reduction in loan amount. More stringent mean-testing measure was also announced.

The profile of student loan borrowers

US News reported in March 2014 that although the bulk of the loan in the US (60%) are for borrowers taking undergraduate courses, a worrying trend is that the remaining 40% is owed by graduate students who account for only 16% of the number of borrowers. The average owed by 70% of those graduating with an undergraduate degree in 2012 was US$29,400, in contrast the amount owed by the average graduate student was US$57,600 with many facing debts of US$100,000 or above.

In contrast, most Malaysian graduate students are only eligible to apply for PTPTN loans if they enroll in public universities and a handful of private universities.  In addition, different levels of financial support ranging from full scholarships at public and private universities, various government scholarship schemes and jobs as research assistants have diminished the reliance of graduate students on PTPTN. It can be assumed that the bulk of the borrowers of PTPTN loans are for undergraduate studies. An attempt to obtain the percentage and amount owed by borrowers pursuing graduate studies has not been successful. The financing of graduate studies by working adults in Malaysia also traditionally rely on EPF withdrawal, commercial bank loans or own savings. Only those enrolled for part-time studies at public universities and a limited number of for-profit institutions are eligible for PTPTN loans.

 

What the US experts have predicted regarding student loan crisis

• There might be a cap to student loan guarantee by the US government. This would spark off a crisis mirroring the sub-prime mortgage financial crisis of 2008. With difficult availability of student loans, colleges, especially the for-profit institutions will find it hard to fill up seats, collapse of the higher education industry could occur.
• There will be diminished economic productivity from young graduates in the long run as they are spending higher percentage of their income to service student loan debt. This coupled with the 44% US graduate underemployment rate means that the income level of a significant number of borrowers may not be sufficient to cover their student loan repayment fully.
• The spiraling US college tuition fees over the period between 2001/2 to 2011/12 have seen public universities tuition and other fees rose by 40% and that of private institutions rose by 28%. This coupled with the ready availability of student loan have increased the amount of debt held by each US borrower.
• For-profit US institutions have only 13% of the total population of students but account collectively for 31% of student loan. Their students also have higher default rate of 22% compared to those studied public institutions. 72% of for-profit institutions produced graduates who earn less than the average high school dropouts. This is a reflection on the market perception of the quality of some of these US for-profit colleges. Many have significant reliance on government-backed student loans to sustain their operation. Corinthian Colleges which has 72,000 students received US$1.4 billion of its US$1.6 billion revenue in 2013 from government funded student loans. It has to sell off all its 85 of its campuses and closing down 12 because of the trouble with government funded student loan issues.

The majority of the predictions above regarding US higher education institutions, especially for-profit colleges may have similar reflections in Malaysia. A PTPTN loan crisis will definitely result in the tightening of the rules regarding the eligibility criteria of borrowers. A squeeze of 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. This will lead to a second wave of consolidation of not only the number of for-profit institutions but the types of programmes (as did the tightening of the funding rules regarding nursing programmes a few years ago which resulted in the collapse of a number of smaller private nursing colleges). There is no indication that graduate from for-profit institutions in Malaysia are more prone to defaulting their PTPTN loan. This could be due to the cap in the amount that PTPTN imposes on each type of study programme. There is also no indication that graduates of for-profit institutions earning less than their public university counterparts as shown in the US.

One aspect of the US higher education scene that may not play out in Malaysia is the spiralling of tuition fees. This is a combination of market condition and the way the regulatory authorities and funding bodies exerting tight control over the tuition fees that for-profit institutions are allowed to charge in Malaysia. Additionally, public institutions’ tuition fees level is determined by the Malaysian Government with most degree programmes receiving 90% or more in subsidies to keep these fees low. With PTPTN having a cap on funding for different degree programmes at for-profit institutions coupled with the fierce competition  in the private higher education sector means that most private players (with the exception of the market leaders such as Taylor’s University and Sunway University which can command higher than market rates) will price their tuition fees around the PTPTN capped levels to stay competitive.Thus dramatic rise in tuition fees is not an issue in Malaysia.

Comparison of some effects on student loan defaulters in the USA & Malaysia:

• US education debt cannot be eased even if one dies or files for bankruptcy. In contrast, PTPTN loan scheme includes loan insurance to cover the loan in the event of the death of the borrower but bankruptcy may not be covered by insurance. PTPTN in 2011 declared that although it has the right to declare defaulters with loan that is over RM30,000 as bankrupts, it has decided not to pursue this route to recover its fund.
• Since 2004, student debts in the US has increased by 56.8% per person on average but the average salary for young people in USA has in fact dipped by 10%. Fresh graduate salary in Malaysia actually grew by 8% in 2013 but the starting salary is still low at RM2,400 to RM2,800. A fresh medical graduate from a for-profit medical school with a RM300,000 loan for tuition fees will find it hard to pay off the study loan with a starting salary of around RM3,000. But PTPTN’s cap for medical degree programme is RM30,000 per year or RM150,000 for the programme. However, most PTPTN loan borrowers, especially those who have graduated from public universities who are employed should be able to service their study loans. These salary data from Malaysia was collected for fresh graduates entering jobs relevant to their fields of study. The 40% and 44% underemployment of fresh graduates in Malaysia and the USA respectively may limit those trapped in this circumstance to service their student loans adequately.
• The 6.8 million student loan defaulters in the USA will find that their credit rating drops drastically, they may not be eligible for government jobs. They may not even get their transcripts (which are increasingly being demanded by employers) for them to apply for jobs.  While Malaysian for-profit institutions practice the same withholding of transcripts for graduates who have outstanding bills, they are not bound by any regulation to do the same on behalf of PTPTN to make loan defaulters pay up. PTPTN has been directed not to blacklist a large proportion of the defaulters with credit agencies but it is interesting to see if more defaulters do not pay up will this be one of the measures implemented. [In November 2014 PTPTN did announce the listing of loan defaulters in the credit agency’s blacklist which have since saw an increase in repayment rates by borrowers]
• Some states in the USA will disqualify student loan defaulters from professional licences such as nursing, some will voke driving licences of defaulters. In Malaysia, PTPTN may not have the power to do likewise but it can work with professional organisations such as the Malaysian Medical Association, The Nursing Board, Institute of Accountants, etc. to come to some arrangements to bar loan defaulters from registering with the relevant boards.

Remedies for treating the problem of student loan defaults:

There have been many diverse opinion on what should be done to alleviate the problem of student loans default in the USA. Student loan “forgiveness” is one of the remedial actions taken in the USA. This has been implemented since 2007 where if a borrower fulfills certain conditions he/she pays back the loan according to how much he/she earns and not how much he/she owes. There is a cap of US$57,500 that can be forgiven in this way but those taking up graduate studies are not subjected to any cap. The cost of this “loan forgiven” scheme initially cost the US Government US$1.7 billion but has since ballooned to US$7.6 billion by April 2014.

Since 1965, the US Federal government have been providing Pell Grant to needy student to enable them to pay for college education. The amount of Pell grant that an eligible person can obtain in 2014 is US$5,730 for a maximum lifetime value for 6 years (i.e. US$34,380). In 2014, Pell grant benefited 9 millions US citizens at a cost of US$33.0 billion. Some believe that extending the Pell grant by relaxing some of the mean-tested qualifying criteria may be one of the remedies.

In comparison Malaysia’s PTPTN does have a “loan forgiven” scheme for borrowers who scored first class degrees to convert their entire loan to scholarships. What this scheme costs so far and how many have been benefited are not available at present. [as of September 2014, PTPTN has converted the loans of 22,150 high achieving borrowers to scholarships, costing the fund RM603.1 million]. However there has not been any other criteria set that will trigger “loan forgiven” by PTPTN. Perhaps “loan forgiven” can be considered for cases whereby certain categories of borrowers for instance those with medical, allied health science or teaching qualifications can be enticed to serve for an extended period in remote areas of Sabah or Sarawak in return for full or partial “loan forgiven” scheme.

There is also an equivalent of Pell grant in Malaysia in the form of Majlis Amanah Rakyat (MARA) bursary and scholarships that it has been disbursing for decades. However MARA scholarships and bursary are provided only for the bumiputera community and are not universally available depending on the financial neediness of the applicants as in Pell grant’s case. Perhaps the Malaysian Government should take a look at Pell grant to ensure the very poor have equal access to higher education?

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