Sustainability of higher education loan financing raises questions

Dar es Salaam. The government decision to completely abolish all levies collected by the Higher Education Student Loan Board (HESLB) has been a victory for the beneficiaries, but contrary to the expectations of economists who voice concerns about the sustainability of the revolving scheme.

Since its establishment in 2004, to manage student loans, HESLB has enabled thousands of young Tanzanians to get loans, achieve their dreams and many are contributing to the national economy, thanks to the government’s idea that resulted in a cost sharing policy.

But even so, HESLB has been facing several setbacks including what the government states as poor recovery of loans from beneficiaries.

Currently, the pace stands at 32 percent and some employers fail to cooperate by not reporting their employees who benefited from the loans, while others do not facilitate the timely remittance of monthly deductions.

Such challenges that have hampered the development of the education fund, they say, have existed and were not caused by the presence of the levies, thus many students continued to miss higher education loans due to lack of adequate funding.

As years go by, students in need of such funding are increasing, so they (experts) believe that the removal of some of the “significant” tariffs such as the value retention fee adds salt to the wound.

On July 1, 2021 the ministry of education decided to abolish imposes that were considered a burden on the loan beneficiaries as implementation of President Samia Suluhu Hassan’s new directives on higher education loans, few months after she assumed top office.

As a result, the six percent charge in value retention was scrapped, with the HESLB’s board of directors instructed to also remove the 10 percent penalty charged for delayed loan servicing as well as the loan administration fee amounting to one percent per annum.

From the beginning, introduction of some of the levies aimed at making the fund sustainable to enable lending to other needy students, facilitate the revolving scheme’s operational activities and hold the debtors accountable.

The six percent VRF was charged yearly on outstanding loan balance and not the principal loan. It was introduced in 2012/13 to among other things enable the government through HESLB, have a sustainable fund that will allow lending to others without compromising the value of the loan money that the beneficiary owed.

The Board was imposing a 10 percent penalty on the debt owed by a beneficiary who has not come forward to begin repaying the loan after graduation as prescribed by law, just to make debtors accountable.

Third levy was a loan administration fee amounting to one percent charged once a year on the principal loan of the beneficiary to facilitate operational activities of the board including improving technological systems, finding beneficiaries, sending invoices among other activities.

However, the three levies raised serious complaints among the beneficiaries of increased interest on their debts, which, according to the HESLB, was due to their (debtors) ignorance or failure to find out the various deductions, including penalties for late repayment.

The outcry, which also surfaced in parliament from time to time, prompted President Hassan to order the ban in order to meet the fund’s goal of helping Tanzanian students who could not afford higher education.

The move was welcomed by a large percentage of graduates and higher education students who feared the growth of their debt at a time when most had no jobs or income to repay their loans two years after graduation, parents/guardians and some lawmakers were happy as well. However, reports say there were graduates who managed to repay their debts on time even with the levies available.

HESLB sustainability question

Even though HESLB reports that it has recorded an enormous increase in loan repayments after the government scrapped the six percent VRF and other related charges on loan beneficiaries who voluntarily repay their loans, analysts say the institution’s ability to continue to perform well a time when needy students continue to increase isn’t reliable.

“Even when we had all these levies, HESLB still faced the challenge of collecting debt to cover other needs. Today, when the charges have completely been eliminated the burden remains on the shoulders of the ministry that is already in dire need of resources,” says Dr Mathew Chacha, a Tanzanian economist based in the US.

Explaining the importance of value retention fee for fund sustainability, Dr Chacha says the government may not want to benefit from the loan but VRF levy is important in protecting the value of money from setbacks such as inflation.

He tells The Citizen that considering the increase in the number of needy students joining higher learning institutions every year, it is obvious the government cannot cope with the number of students who will need funding in some 10 years or more to come.

“These trends had necessitated the education sector stakeholders to think of ways to retain the value of loans to higher education students to maintain more of them joining the higher education levels. This is what the scheme means even in the developed world,” he discloses.

He asks why some of the important levies like VRF have not been reduced rather than abolished altogether and instead greater emphasis on the importance of the fund be placed to the public?

“Normally human beings are made to be forced to do things, we know it is the responsibility of everyone who gets a higher education loan to repay, but without any conditions, after a few years, more challenges will arise. We call upon parliament to rethink about the sustainability of the education fund and help the government devise alternative ways to protect it,” he says.

He says that normally VRF was not imposed on student loans for the board to make a massive profit. It was done to offset the costs of loaning money, including inflation, and because lending money is risky.

“It is obvious that some people will default on their loans, and that means lost revenue for the government, so HESLB reduced its risk of losing money by charging VRF,” he observes.

For her part, Dr Eda Mfinanga, an economist and expert in the banking sector says the government may not fail to fund the students, but warns that competition in public resources will put a heavy burden on the government, at a time when the education sector needs more resources.

“If proper knowledge about the lending and responsibility of the recipient were provided and every beneficiary understood, then people could repay their loans, but they could also understand the importance of maintaining value for money, even if the rate was slightly reduced,” she says.

He goes on to say: “Lending to a person for three or four years, who will start repayment of the same amount he borrowed 10 years later is a huge negative for the country. Also, many will not be responsible for repaying in time, which will require HESLB to use extra energy and high-level creativity or even more resources to make debtors to comply.”

She notes that, to reduce distress and default among student-loan borrowers, removing all levies is also the wrong policy that does little for distressed borrowers while providing windfall gains to those having no trouble repaying their loans.

“A well-designed, income-based repayment plan allows borrowers to pay back their loans when and if they are able and is the best route to reducing default and distress,” she believes.

She explains that scraping VRT from a scheme whose vision is to become a reliable and sustainable higher education revolving fund, was a blunt, ineffective, and expensive tool for increasing schooling and reducing loan defaults.

“Politically motivated decisions like this should be followed by professional advice with the aim of protecting an important fund like HESLB,” she notes.