Economics of Education Review 37 (2013) 298308

Contents lists available at SciVerse ScienceDirect

Economics of Education Review

journal homepage: www.elsevier.com/locate/econedurev

Repayment burdens of student loans for Vietnamese higher education

Bruce Chapman, Amy Y.C. Liu *
Crawford School of Economics and Government, The Australian National University, Australia

A R T I C L E I N F O

A B S T R A C T

Article history: Received 15 January 2013 Received in revised form 13 June 2013 Accepted 19 June 2013 JEL classication: I00 I20 I22 I28 Keywords: Student loans Repayment burden Government aid Vietnam

Expansion of high education in Vietnam will be undermined without an effective student, loans policy to assist with tuition and living costs. We show the signicance of this issue is by, constructing a hypothetical loans system and calculating repayment burdens (RBs) (the proportion of, a graduates income required to repay the debt) for male and female in four different parts of Vietnam, and with respect to two levels of loans. Importantly, the exercises examine RBs across the whole, distribution of income using unconditional quantile techniques. We nd that RBs involving loans for, tuition only are likely to lead to signicant RBs for poor graduates, with much higher loans being, associated with critical nancial difculties for perhaps the majority of debtors. This will result in high, default rates and consumption difculties for borrowers, implying strongly that a student loan system, with such high RBs is unlikely to be successful in Vietnam. 2013 Elsevier Ltd. All rights reserved.

1. Introduction As Vietnams institutions of higher education face the challenges of how to meet the rising demand for higher education amid enhancing quality with limited resources, greater cost sharing with students through increases in tuition seems to be unavoidable.1 It is well known that signicant contributions from students can only be achieved in equitable and efcient ways with the use of a student loans system (Chapman, 2006; Friedman, 1955), but it also apparent that Vietnamese higher education

lacks a well-designed and universal nancing mechanism. Currently, the student loan scheme is not a broadly-based program and only targets the most disadvantaged students.2 Below we explore the implications of the adoption in Vietnam of a typical higher education student nancing system, a mortgage-type arrangement in which loan repayments are made on the basis of pre-determined amounts over a given time period.3 Our focus is on the reporting of so-called repayment burdens (RB), the proportions of graduate incomes per period that need to be allocated to repay loans. To this

* Corresponding author. Tel.: +61 2 6125 0177. E-mail addresses: bruce.chapman@anu.edu.au (B. Chapman), yukchu.liu@anu.edu.au (Amy Y.C. Liu). 1 In 2008, the Education and Training Ministry increased tuition fees by 30 per cent from an average of VND 180,000 per month (VietNamNet, 2008) even while expenditure on education and training as a share of total state expenditure rose from 15 to 18.2 per cent between 2000 and 2008 (World Bank, 2009). 0272-7757/$ see front matter 2013 Elsevier Ltd. All rights reserved. http://dx.doi.org/10.1016/j.econedurev.2013.06.009

2 Since the introduction of the pilot student loans scheme to assist students from poor families in 1994, there have been several revisions of the original scheme the Decision on credit for disadvantaged students in 2002 (No. 78/2002/ND-CP), 2003 (No.153/2003/QD-TTg), 2006 (Decree No. 107/2006/QD-TTg), and 2007 (Decree No. 157/2007/QD-TTg). The latest scheme (Decree No. 157/2007/QD-TTg) was issued in June 2011. 3 These are the most common forms of loan scheme and are currently in operation in the US, Canada and Thailand, for example.

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308

299

end we design a hypothetical, but plausible, mortgagetype student loans scheme, and simulate RBs for graduates in four different parts of the country, using actual incomes from the Vietnam Households Living Standards Survey of 2006. We follow a series of papers4 (in simulating RBs for graduates at different parts of the graduate earnings distribution using the unconditional quantile regression (UQR) approach) that has been used in analyses of student loans schemes in Thailand, the US, Germany and Vietnam. The current paper reports a considerable expansion of an analysis using a similar approach for Vietnam (Chapman, 2013), which differs in the following ways. First, Chapman (2013) analyzed a much smaller subset of Vietnamese graduates by focusing only on those living in urban areas that can be considered to be relatively rich, and in rural areas that can be considered to be relatively poor. The current paper covers all of Vietnam, including analysis of relatively poor urban and relatively rich rural communities as well. Second, Chapman (2013) examined repayment burdens only with respect to very large loans, used to nance both tuition and living expenses, with the current paper reporting estimates for much smaller levels of loans designed to facilitate tuition payment only. Thus the exercise has important lessons for even quite modest changes to the contemporary Vietnam higher education nancing landscape. Finally, for the rst time we show the RBs for graduates from all geographic areas who experience relatively high (in the top quartile) incomes. The research reported below has three major ndings: (i) RBs for a mortgage-type loan system are extremely high for a minority of Vietnamese graduates even with loans designed to cover only tuition charges and such loans will also pose nancial difculties for the majority of borrowers; (ii) With the much higher loans needed to cover living expenses as well as tuition, the situation with respect to repayment difculties across all of Vietnam will be roughly twice as difcult for just about all borrowers and constitute a key difculty and constraint to the expansion of higher education for that country; and (iii) Surprisingly, and importantly, in the poorest areas it is clear that even the most advantaged graduates in terms of income will face signicant difculties with loan RBs for relatively high loan levels. Thus it is the case that even for many relatively rich graduates a traditional loan system will have important operational concerns. It follows that given the types of student loan reforms that might be expected in the near future, the prospects for consumption hardship and default, and the adverse consequences for both students and the government, are implicit and clear. In the case of large loans nancing both tuition and living expenses, it would appear that a signicant expansion in both the size and coverage of

mortgage-type student loans for prospective Vietnamese higher education students is unlikely to facilitate the type of reforms in higher education graduation rates that seem to be warranted. Beyond the Vietnamese higher education reform debate our exercises also contribute to the literature in an understanding of the importance of the design of student loans schemes for low income developing countries in transition more broadly. The exercises reported imply strongly that propitious reforms to Vietnams higher education nancing system cannot be resolved with the adoption of a traditional student loan policy; different mechanisms will be required. What this might mean for policy is considered briey. This paper is organized in ve sections. In Section 2 the concept of repayment burdens is examined and Section 3 describes the hypothetical loans scheme. Section 4 presents the case for the use of unconditional quantile regression methods, describes the data and presents ageearnings proles for four different Vietnamese regions by sex. Section 5 estimates and discusses the repayment burdens. 2. The meaning and international comparisons of repayment burdens 2.1. What is a loan repayment burden?5 Education economists and others have examined the concept and implications of RBs for more than a quarter of a century.6 Dened simply, a loan repayment burden is the proportion of a persons income that needs to be allocated to service a debt per period, or, formally: Rapayment burden in period t loan repayment in period t income in period t (1)

There are several policy design issues usually raised with respect to RBs. The rst is motivated by the importance of difculties faced by debtors in meeting obligations, it obviously being the case that the higher is a debtors RB the lower are disposable incomes. This is of importance in comparisons of different student loan policies: specically, mortgage-type loans, such as the most common form in the US (Stafford student loans) and Canada are quite different to income contingent loans (ICL) in this respect. This is due to the fact that the latter are explicitly designed to avoid high repayment burdens and this is achieved through per period debt servicing obligations being capped by legislation (Chapman & Lounkaew, 2010a).7 A second is that greater RBs are associated with higher prospects that debtors will default on loan repayments because of low incomes. This issue is substantiated by the

4 Chapman et al. (2010), Chapman and Lounkaew (2011), Chapman and Sinning (2012), Chapman and Suryadarma (2013) and Chapman (2013).

This section follows Chapman et al. (2010) and Chapman (2013). See Woodhall (1987), Ziderman (1999), Schwartz and Finnie (2002), Salmi (2003) and Baum and Schwartz (2006). 7 In the Australian income contingent college loan scheme, for example, the maximum percentage of taxable income of the debt that is repaid is 8 per cent per annum.
6

300

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308

nding of Dynarski (1994) and Gross, Cekic, Hossler, and Hillman (2009) that student loan defaulters in the US are much more likely to have low levels of income. Typically student loan schemes (such as Stafford loans) come with a government guarantee to cover the debts when a student defaults,8 which means that taxpayers subsidize the loan scheme. An associated policy mechanism relates to the provision of interest rate subsidies on student loans,9 which are presumably designed to diminish consumption hardship and default probabilities. Woodhall (1987) integrates these concerns by stressing that governments face a balancing act in the design of mortgage-type loan schemes. Specically, ceteris paribus, the lower are interest rate subsidies the higher will be repayment burdens. The design complexities do not end with this obvious trade-off because the lower are interest rate subsidies the greater is the prospect of default, with this adding to taxpayer contributions. Important research is provided by Shen and Ziderman (2009) which offers calculations of taxpayer interest rate subsidies for a large number of student loan schemes from many countries, and Schwartz and Finnie (2002) which presents repayment burdens for hypothetical debtors in the Canada Student Loans scheme. As well, Chapman, Lounkaew, Polsiri, Sarachitti, and Sitthipongpanich (2010) illustrates taxpayer subsidies associated with the Thai Student Loan Fund. With this as policy background we now examine several empirical aspects of the debate. A related important question concerns the optimal size of a RB, given that the consumption difculties experienced by debtors with low incomes need to be traded off with the size of public sector subsidies associated with loans taking relatively long periods to be repaid. There is a signicant literature on this topic (see Chapman et al., 2010), in which it is clear that while there is no consensus on this, RBs in of the order of 1015 per cent are generally seen to be undesirable with respect to default probabilities and consumption hardship. 2.2. International comparisons of RBs There have by now been several studies of RBs, for actual student loan schemes in Thailand (Chapman et al., 2010) and the US (Chapman & Lounkaew, 2010b), and for hypothetical schemes designed for Germany (Chapman & Sinning, 2012) and Indonesia (Chapman & Suryadarma, 2013). The interesting aspect of these exercises is the adoption of the method described below, which uses unconditional quantile approaches to calculate RBs for graduate debtors across ranges of incomes by age and sex. There are some common ndings for these different countries, including that for debtors in the bottom quartile of graduate income distributions:

(i) Relatively poor graduates living in relatively poor countries face extremely high RBs, which can be as much as 80 per cent in some cases10; (ii) The majority of all graduates living in poor countries are likely to experience signicant difculties in repaying student loans, which is still surprisingly the case for those earning incomes well above the lowest; and (iii) Even graduates in relatively rich countries face high repayment burdens, ranging from 70 per cent for East German women (Chapman & Sinning, 2012) and 50 per cent for US lawyers working in the public sector (Chapman & Lounkaew, 2011). The important policy point is that schemes with repayments based on time (mortgage-type loans) result in signicant difculties for a minority of debtors in a range of circumstances across different countries, and that these hardships are greatest the lower are the incomes of the countries studied. There are critical issues from these ndings because of what they imply for both loan default probabilities and/or large government subsidies taking the form of unpaid debts. 3. The repayment burden empirical method 3.1. Introduction To derive RBs for Vietnam estimates are required for the nominator and denominator of Eq. (1). The numerator can be calculated from the characteristics of the student loan under consideration, with the factors pertinent to the expected annual repayments of a student loan are: the sums of money provided in the study period; the rate of interest on the debt; and the time allowed for full repayment of the loan. For our exercises we need to be clear also about the typical student/graduate experience that underlies our illustrations. For these purposes, the hypothetical student/ graduate path in terms of age and time. It is assumed that students enroll at age 18 years, and complete a four year degree in the minimum time, graduating at age 22. What now follows shows the time stream of loan repayments. 3.2. The loans scheme explained Because Vietnam does not have a broadly based higher education student loans system, the system now described is hypothetical but plausible. As a guide to the characteristics of a standard student loans system for Vietnam, the following features have been assumed: total debts per student of 16 and 32 million dong, in which the rst gure roughly reects average tuition charges currently charged in Vietnamese universities and the second adds to this an estimate for minimal living expenses. We assume a real rate of interest of 3 per cent per annum, and a repayment period of 10 years. These assumptions have been informed by the levels and structures used in the student loan systems of other countries, such as the US, Canada and Thailand. Given these assumed debts and parameters Figs. 1 and 2 illustrate the annual repayment obligations in nominal and real terms (assuming a price ination rate of 3 per cent per

8 It is commonly understood that the commercial nancing sector will not provide loans to students because of their lack of collateral in the event of default (Barr, 2003; Chapman, 2006; Friedman, 1955). 9 For recent analyses see Ziderman (2003) and Chapman and Lounkaew (2010a). 10 This is the case, for example, for those in the lowest 20 per cent of graduate incomes in Sumatra (Chapman & Suryadarma, 2013).

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308

301

18

20

22

24

26 Age

28

30

32

34

36

region of only 24 per cent annually (p. 83), and adds that . . .the Thai student loan scheme is overly generous. . .which may be effortlessly repaid out of higher income received on courses of schooling. (p. 83). However, beyond average graduate earnings there are wide dispersions of income received by graduates, a fact highlighted by the relatively low explanatory power for these models.11 Like many issues in economics, many of the most interesting empirical aspects for policy are not to be found with averages but concern the tails of the distributions. It is useful to examine briey the technical basis for the use of the unconditional quantile method underpinning the approach. With this method variants of the standard earnings function of the following form can be used: ln Ii j b0 j b1 j experiencei j b2 j experience2 ij ei j ; (2)

Nominal Annual Repayment

Real Annual Repayment

Fig. 1. Vietnamese hypothetical loan repayments (16,000,000 dong).

where i = 1, 2, 3, . . ., n represent individuals; j = graduates differing by income; Ii is the sum of annual earnings, social security payments and unemployment insurance payouts of individual I, differentiated by sex. To capture differences in increases of income with age these are also interacted with potential experience (PE) and its square, dened as: PE age in years time to complete a degree in years age at which schooling begins The unconditional quantile regression (UQR) technique is employed to estimate earnings functions, with this technique being chosen to address the shortcomings associated with the use of OLS, in two senses. The rst is that OLS estimates the mean value conditional on the distribution of the dependent variable, with a concern arising if the conditional distribution of dependent variable is skewed, asymmetric, and/or does not have a unique mode. Using OLS estimates may not give robust results, this problem being common in the context of wage determination given the asymmetry in wage distributions.12 A second attractive feature of (and the most important reason for us to use) unconditional quantile regression is that it provides a disaggregated picture of earnings distributions. This advantage is crucial to our analysis of student loans since repayment burdens must be highest for those in the lowest parts of the distribution (Chapman & Lounkaew, 2010a; Chapman et al., 2010), a feature which cannot be captured by the use of standard OLS. Thus we estimate age-earnings proles for the 25th, 50th (median) and 75th quantiles of graduate earnings distributions by age, with separate estimations being carried out for males and females.13

18

20

22

24

26 Age

28

30

32

34

36

Nominal Annual Repayment

Real Annual Repayment

Fig. 2. Vietnamese hypothetical loan repayments (32,000,000 dong).

annum) for typical students borrowing in our hypothetical Vietnamese student loan system. Figs. 1 and 2 show that for loans of 16 and 32 million dong, annual nominal repayments required will be just over 4 and 2 million dong, and that in real terms the annual repayment requirements will fall to about half by the end of the 10 year repayment period. To complete the basis of calculations of RBs requires estimates of the distributions of graduate earnings, with the method used now described. 3.3. Calculating disaggregated earnings data The denominator of Eq. (1), the per-period income received by student loan debtors, is critical to the exercise. An important point is that signicant research so far has used very aggregate proxies of incomes, such as that received by graduates on average. Ziderman (2003), for example, in an analysis of the repayment burdens associated with the Thai Student Loan Fund, compared debt servicing obligations to the earnings of graduates using predictions from Thai earnings functions. From this Ziderman concludes that The annual repayment burden in terms of annual income is very light, in the

11 For example, Chapman and Lounkaew (2010a) found an R2 of around 0.4 for Thai earning functions; a plethora of other earnings function studies typically explain no more than 2030 per cent of the variance. 12 Many recent studies have used disaggregated approach to analyze wage distribution and wage determination (Buchinsky, 1998; Machado & Mata, 2005). 13 These proles have been adjusted using OLS standard errors (see Wooldridge, 2006).

302 Table 1 Summary statistics.

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308

Males Mean Urban poor Annual earnings (VDN) Potential experience Potential experience2 No. of observations Urban rich Annual earnings (VDN) Potential experience Potential experience2 No. of observations Rural poor Annual earnings (VDN) Potential experience Potential experience2 No. of observations Rural rich Annual earnings (VDN) Potential experience Potential experience2 No. of observations 2.32 107 19.22 476.19 584 3.29 107 17.97 429.27 789 1.67 107 17.44 405.69 195 2.09 107 15.45 341.72 277 S.D. 1.09 107 0.43 16.63

Females Mean 1.85 107 15.25 326.64 401 2.63 107 15.29 335.15 588 1.42 107 12.56 232.26 120 1.78 107 12.39 229.03 172 S.D. 8,108,192 0.48 16.74

2.19 107 0.37 14.29

1.64 107 0.42 14.81

6,787,121 0.72 27.57

6,088,913 0.79 23.50

1.08 107 0.61 22.36

8,371,375 0.66 20.28

The unconditional quantile regression method follows Firpo, Fortin, and Lemieux (2009), a technique which relies on a transformation known as re-centered inuence function (RIF). The RIF for the quantile of interest qt is RIF I; qt qt

t D I  q t
f I qt

(3)

where fI() is the marginal density function of I where D is an indicator function. In practice RIF(I ; qt) is not observed, hence its sample counterpart is used instead: t q t RIF I; q t t D I  q fI qt ; (4)

t is the sample quantile and fI qt is the kernel where q density estimator, with this transformed variable being used in place of the original dependent variable. One crucial distinguishing feature of the UQR is that it provides us with a way to recover the marginal impact of the regressors on the unconditional quantile of I; in the context of this study it is the marginal impact of additional years of potential experience on income of Q25 and Q50. 4. Estimating graduate age-earnings functions 4.1. The data In what now follows the Vietnam Households Living Standards Survey 2006 (VHLSS06) is used to illustrate

graduate annual earnings by age, separately for males and females, and by location. The VHLSS06 was conducted nation-wide by the Vietnam General Ofce of Statistics and contains very rich information with respect to individuals and households. The individuals sample includes wage earners between 22 and 60 years old14 with an undergraduate degree who worked in the preceding 12 months and who supplied earnings data (we have excluded the very small number of unemployed). Our dependent variable is earnings, not income,15 and includes measures of wage and salaries, in-cash and in-kind bonus in the main job. Preliminary estimates revealed that there are very signicant differences in earnings between regions and urban/rural locations in Vietnam, as revealed with respect to both shift dummy and slope coefcients. Accordingly, we disaggregated the analyses by regions revealed to have relatively high earnings (labeled rich regions) and low earnings (labeled poor regions). Rich regions are Red River Delta, South East, and Mekong River Delta, with the poor regions being North East, North West, North Central Coast, South Central Coast, and Central Highland. We further divided the regions into urban and rural, because there were critical differences apparent in earnings in this context as well. Table 1 shows the main statistical characteristics of the data. 4.2. Earnings function results To construct the earnings prole of degree holders we estimate an equation for men and women with the log of

14 The ofcial retirement age is 60 and 65 for men and women. We also repeated the exercise by excluding graduates who were older than 40 years of age to avoid the complications due to older individuals obtaining their degrees under very different education regimes from the one that is currently in place, but no important differences emerged.

15 For countries such as Vietnam earnings are essentially equivalent to incomes for the vast majority of those in wage and salary employment.

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308

303

annual earnings in the main job as the dependent variable, with the independent variables being potential experience and potential experience squared. Importantly, aside from estimating OLS we also did estimations using the unconditional quantile method described above. Because they are critical to calculations of RBs, our focus is on the results for both Q25 and Q75 (lowest and highest 25 per cent of earnings by age and sex), and Q50 (the median earnings group by age and sex). The OLS and the UQR regression results are presented in Appendix 1. At the mean and at different points of the graduates earnings distribution the signs of experience and its square indicate the usual concave relationship between age and earnings, and the coefcients are very similar to those found for other countries.16 Graphical representations of the results are now shown in Fig. 3. 4.3. Discussion With respect to the results for Q25, Q50 and Q75 the main ndings are: (i) For all groups, graduate earnings generally increase with potential experience at a decreasing rate, which is entirely consistent with a plethora of international ndings; (ii) Male graduates generally earn more than female graduates, of the order of 20 per cent per year; (iii) Graduates of both sexes in urban rich areas generally earn about 50 per cent more than graduates from urban poor areas; (iv) Graduates of both sexes in rural rich areas generally earn about 50 per cent more than graduates from urban poor areas; (v) Average Q75 graduate earnings are between 50 and 100 per cent higher than average Q25 earnings, and the ratio is slightly less for females than it is for males; (vi) There are signicant earnings differences between urban and rural areas, with the former averaging around double those of the latter; and (vii) Consistent with this, graduates in the Q75 part of the earnings distribution in rural areas earn about the same as graduates in the Q25 part of the earnings distribution in urban areas. These data may now be used in calculations of RBs, and these are now reported. 5. Repayment burden estimates 5.1. Introduction This section combines the data from the age-structures of the hypothetical loan scheme illustrated in Figs. 1 and 2 and the age-earnings proles reported in Section 4 to show expected RBs for a Vietnamese student loan scheme. The focus is on the RBs for low earning graduates (those in the bottom quartile of graduate earnings), with respect to both loan sizes, totaling 16 and 32 million dong, the second of

which combines loans for estimated tuition costs to a representation of the nancial resources assumed to be needed for income support.17 As well, some attention is accorded RBs for the highest earning graduates (those in the top quartile of graduate earnings) with relatively high debts of 32 million dong. 5.2. Low graduate earnings repayment burdens: 16 million dong loans The most important aspect of our exercises relates to the calculation of repayment burdens for low earning graduates, dened as those in the lowest quartile of graduate earnings (by sex and age). These are shown in Figs. 4 and 5 for the lower loan total. The main points from the RBs presented in Figs. 4 and 5 are as follows. For loan levels about at typical tuition charges, assumed to be a total of 16 million dong for a four year degree, those earning in the bottom 25 per cent of the graduate earnings distribution by age and sex will face RBs: (i) Which average from about 15 to 25 per cent across the repayment period of ten years; (ii) Of around 2540 per cent of earnings for young graduates living in poor rural areas; (iii) Of at least 10 per cent at their lowest point for the least disadvantaged of the groups; and (iv) That are not markedly different between men and women. 5.3. Low graduate earnings repayment burdens: 32 million dong loans The same exercises have been repeated for the higher loan level totaling 32 million dong and the results are presented in Figs. 6 and 7. By construction, the RBs for the doubled level of loans are twice as high as those calculated for the 16 million dong loan. Thus from the gures, for loans totalling 32 million dong, those earning in the bottom 25 per cent of the graduate earnings distribution by age and sex will face RBs: (i) Which average from about 30 to 50 per cent across the repayment period of ten years; (ii) Of around 5080 per cent of earnings for young graduates living in poor rural areas; (iii) Of at least 20 per cent at their lowest point for the least disadvantaged of the groups; and (iv) That are not markedly different between men and women. 5.4. High graduate earnings repayment burdens: 32 million dong loans We are also in a position to address the question of what RBs would be for those in the estimations earning the

16

See Chapman et al. (2010) for Thailand for example.

17

A full set of RB results are available from the authors.

304

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308

Predicted Annual Income, Million Dong

Urban Rich Male: Q25, Q50 and Q75 Age-Income Profiles

40 35 30 25 20 15 10 5 0 40 35 30 25 20 15 10 5 0

Urban Rich Female: Q25, Q50 and Q75 Age-Income Profiles

18

20

22

24

26 28 Age

30

32 Q50

34

36

18

20

22

24

26 Q25 Q75

28 Age

30

32 Q50

34

36

Q25 Q75

40 35 30 25 20 15 10 5 0

Predicted Annual Income, Million Dong

Urban Poor Male: Q25, Q50 and Q75 Age-Income Profiles

40 35 30 25 20 15 10 5 0

Urban Poor Female: Q25, Q50 and Q75 Age-Income Profiles

18

20

22

24

26

28 Age

30

32 Q50

34

36

18

20

22

24

26 28 Age Q25 Q75

30

32 Q50

34

36

Q25 Q75

40 35 30 25 20 15 10 5 0

Predicted Annual Income, Million Dong

Rural Rich Male: Q25, Q50 and Q75 Age-Income Profiles

40 35 30 25 20 15 10 5 0

Rural Rich Female: Q25, Q50 and Q75 Age-Income Profiles

18

20

22

24

26 28 Age

30

32 Q50

34

36

18

20

22

24

26 28 Age Q25 Q75

30

32 Q50

34

36

Q25 Q75

Predicted Annual Income, Million Dong

Rural Poor Male: Q25, Q50 and Q75 Age-Income Profiles

10 15 20 25 30 35 40 10 15 20 25 30 35 40

Rural Poor Female: Q25, Q50 and Q75 Age-Income Profiles

18

20

22

24

26 Age

28

30

32 Q50

34

36

18

20

22

24

26 Age Q25 Q75

28

30

32 Q50

34

36

Q25 Q75

Fig. 3. Vietnam age-earnings proles: Q25, Q50 and Q75.

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308

305

Male Q25 (Loan size: 16 mln)

Annual Repayment Burden (%)

Male Q75 (Loan size: 32 mln)

Annual Repayment Burden (%)

UrbanP RuralP RuralR UrbanR

UrbanR RuralR RuralP UrbanP

Fig. 4. Q25 male RBs by region, loan of 16 million dong.

Fig. 8. Q75 male RBs by region, loan of 32 million dong.

Female Q25 (Loan size: 16 mln)

Female Q75 (Loan size: 32 mln)

Annual Repayment Burden (%)

UrbanP RuralP RuralR UrbanR

Annual Repayment Burden (%)

UrbanR RuralR RuralP UrbanP

Fig. 5. Q25 female RBs by region, loan of 16 million dong.

Fig. 9. Q75 female RBs by region, loan of 32 million dong.

Male Q25 (Loan size: 32 mln)

Annual Repayment Burden (%)

highest incomes, that is, for Q75. These are presented in Figs. 8 and 9 with respect to the repayment of the higher loan of 32 million dong. The main ndings for the highest income graduates are that RBs:
UrbanP RuralP RuralR UrbanR

Fig. 6. Q25 male RBs by region, loan of 32 million dong.

Female Q25 (Loan size: 32 mln)

Annual Repayment Burden (%)

(i) Are around 35 per cent for the youngest graduates in the poorest regions; (ii) Average around 1525 per cent for the whole repayment period; (iii) Are at least 10 per cent for the highest earners in the most advantaged regions; and (iv) Are not markedly different between men and women. The ndings for the Q75 sub-population are arguably the most striking of the exercise. They imply strongly that even in the case of the highest earning graduates, a majority are likely to face considerable consumption hardship in the repaying of loans designed to cover both tuition and income support. 6. Conclusions and a possible institutional way forward Using hypothetical yet plausible student loans scheme for Vietnam we have explored empirically the issue of likely RBs in the light of the clear need in the future for a different and expanded system of higher education nancing for this country. Importantly, the calculations

RuralR RuralP UrbanP UrbanR

Fig. 7. Q25 female RBs by region, loan of 32 million dong.

306

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308

have been undertaken at different parts of the graduate earnings distribution using unconditional quantile regression methods, and for different levels of projected student loans. In line with previous studies, our results show that estimating repayment burdens at the mean hide the variations at different parts of the graduate earnings distribution and this is critical to the policy debate. Even for loans just covering reasonable tuition costs, our calculations illustrate quite clearly that there will be heavy repayment burdens for low and very low income graduates, particularly those living in poor areas of Vietnam, and that these heavy burdens will persist for quite a number of years into the repayment period even if students borrow money only to cover tuition costs. For larger loan levels that include nancial assistance to help cover living expenses the RBs are extremely high indeed about double the RBs for tuition loans only. And even for those graduates earning in the top quartile of the graduate earnings distribution the RBs will apparently be very high for a signicant proportion of these groups. These results imply strongly that such reforms will not be a viable response to future higher education nancing needs in Vietnam. Vietnam is still a poor country despite recent impressive economic achievements. Our results highlight the pressing concern for providing access to higher education for students, especially those from poor families (with students from ethnic minorities mostly residing in these households). Also, heavy repayment burdens also mean considerable nancial pressure on graduates generally as they enter the labor market, potentially prompting them to shy away from low-pay occupations, such as teaching.18 In addition, high repayment burdens often are associated with high risk of default despite there being measures such as guarantors and legal actions which can be used to reduce loans repayment risk.19 Further, like all student loans that do not have an income contingent collection basis, both the existing and out hypothetical schemes have a xed repayment period. It would seem to follow that a better designed student loans scheme that reduces RBs to minimize both consumption hardship and loan default risk is critical in the future development of higher education and thus to Vietnams future economic growth prospects. Alternative arrangements such as setting a higher minimum income threshold for repayment; allowing small affordable payment; or including loan forgiveness under certain circumstances are some possible ways to ease the heavy RBs for low and very low income

borrowers. In this context it is useful to canvass possibilities for the design of higher education student loans that in general will not be associated with potentially very costly repayment burdens. Discussion needs to be informed by the reality that there are essentially two types of student nancing schemes: mortgage-type and income contingent loans (ICL). An ICL takes the form of students committing to repay debts depending on their future incomes, and currently operate in Australia, New Zealand, England, Hungary and South Korea. The critical characteristic of an ICL is that maximum repayment burdens are set by legislation,20 to facilitate consumption smoothing and to provide loan default insurance. The downside of a case for an ICL in Vietnam is that loans of this type require accurate identication of borrowers lifetime incomes and consequently usually rely on a countrys personal income tax system to collect debts. However, Vietnams tax system collects very little revenue from personal income tax, accounting for 0.4 per cent of its GDP compared to 10 per cent for OECD countries and 2.5 per cent of the ASEAN-4.21 Thus while the successful institution of an ICL would markedly diminish (perhaps to zero) the adverse potential of high repayment burdens for student borrowers in Vietnam, such a policy reform debate needs to start in the area of governance institutional reform with respect to the income tax system.22 Appendix 1. OLS and unconditional quantile regression results See Tables A1A8.
Table A1 OLS and unconditional quantile regression results for males in urban poor regions. Variables Exp Exp2/1000 Constant (1) OLS (2) Q25 (3) Q50 (4) Q75

0.085*** 0.1171*** 0.049*** 0.023*** (0.012) (0.019) (0.009) (0.008) 1.6737*** 2.2669*** 0.7725*** 0.249 (0.000) (0.000) (0.000) (0.000) 15.968*** 15.398*** 16.357*** 16.850*** (0.103) (0.166) (0.092) (0.055) 584 0.243 32.855 0.000 584 0.156 20.496 0.000 584 0.062 4.879 0.008

584 Observations Adjusted R-squared 0.210 F-Test: exp exp2 51.679 Prob > F 0.000

Robust standard errors in parentheses. *** p < 0.01.

18 This could potentially undermine the governments effort in reforming higher education if there is a shortage of qualied teachers. 19 In the case of default, the Vietnam Bank of Social Policy (VBSP), which administers the loans, will coordinate with local authority and mass organization for debt collection and individuals and organization using employees as disadvantaged students who borrow preferential credit. . .take responsibility for urging them to send money to their families for repayment or directly repay for VBSP (Social Republic of Vietnam, 2007).

20 In Australia, New Zealand and England these proportions are 8, 10 and 9 per cent. 21 See Adams (2004). 22 A full discussion of these issues is in Chapman (2006).

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308 Table A2 OLS and unconditional quantile regression results for females in urban poor regions. Variables exp exp2/1000 Constant (1) OLS 0.094*** (0.016) 2.3514*** (0.000) 15.952*** (0.108) (2) Q25 0.081*** (0.017) 1.8463*** (0.000) 15.766*** (0.125) 401 0.146 18.106 0.000 (3) Q50 0.044*** (0.015) 0.7599* (0.000) 16.270*** (0.110) 401 0.144 6.091 0.002 (4) Q75 0.032*** (0.011) 0.4661 (0.000) 16.602*** (0.077) 401 0.088 4.866 0.008

307

Table A5 OLS and unconditional quantile regression results for males in rural poor regions. Variables exp exp2/1000 Constant (1) OLS 0.053*** (0.019) 1.0766* (0.001) 16.028*** (0.131) 195 0.117 13.220 0.000 (2) Q25 0.101*** (0.023) 2.1408*** (0.001) 15.361*** (0.208) 195 0.139 16.162 0.000 (3) Q50 0.040*** (0.015) 0.5197 (0.000) 16.104*** (0.119) 195 0.162 4.153 0.017 (4) Q75 0.023 (0.014) 0.190 (0.000) 16.529*** (0.115) 195 0.089 1.447 0.238

Observations 401 Adjusted R-squared 0.199 F-Test: exp exp2 27.661 Prob > F 0.000

Observations Adjusted R-squared F-Test: exp exp2 Prob > F

Robust standard errors in parentheses. * p < 0.1. *** p < 0.01.

Robust standard errors in parentheses. * p < 0.1. *** p < 0.01.

Table A3 OLS and unconditional quantiles regression results for males in urban rich regions. Variables Exp exp2/1000 Constant (1) OLS 0.044*** (0.009) 0.9022*** (0.000) 16.804*** (0.071) (2) Q25 0.047*** (0.010) 0.8023*** (0.000) 16.358*** (0.081) 789 0.070 16.613 0.000 (3) Q50 0.029*** (0.009) 0.4585** (0.000) 16.792*** (0.068) 789 0.045 7.935 0.000 (4) Q75 0.027** (0.012) 0.8023 (0.000) 17.233*** (0.089) 789 0.015 3.936 0.020

Table A6 OLS and unconditional quantile regression results for females in rural poor regions. Variables exp exp2/1000 Constant (1) OLS 0.086*** (0.027) 1.8004** (0.001) 15.656*** (0.163) 120 0.342 22.981 0.000 (2) Q25 0.095** (0.037) 2.284* (0.001) 15.433*** (0.196) 120 0.214 5.063 0.008 (3) Q50 0.104*** (0.033) 1.9521* (0.001) 15.574*** (0.199) 120 0.439 6.337 0.002 (4) Q75 0.020 (0.035) 0.5232 (0.001) 16.338*** (0.172) 120 0.285 0.246 0.782

Observations 789 Adjusted R-squared 0.050 F-Test: exp exp2 19.100 Prob > F 0.000

Observations Adjusted R-squared F-Test: exp exp2 Prob > F

Robust standard errors in parentheses. ** p < 0.05. *** p < 0.01.

Robust standard errors in parentheses. * p < 0.1. ** p < 0.05. *** p < 0.01.

Table A4 OLS and unconditional quantiles regressions for females in urban rich regions. Variables exp exp2/1000 Constant (1) OLS (2) Q25 (3) Q50 (4) Q75

Table A7 OLS and unconditional quantiles regression results for males in rural rich regions. Variables exp exp2/1000 Constant (1) OLS 0.053*** (0.017) 0.9515** (0.000) 16.226*** (0.144) 277 0.140 13.873 0.000 (2) Q25 0.071*** (0.018) 1.280*** (0.000) 15.806*** (0.170) 277 0.170 12.318 0.000 (3) Q50 0.031** (0.013) 0.0291 (0.000) 16.392*** (0.106) 277 0.159 3.126 0.045 (4) Q75 0.008 (0.018) 0.1081 (0.001) 16.889*** (0.127) 277 0.026 0.120 0.887

0.073*** 0.087*** 0.039*** 0.014 (0.013) (0.015) (0.009) (0.012) 1.8362*** 2.0007*** 0.7213*** 0.199 (0.000) (0.000) (0.000) (0.000) 16.465*** 15.964*** 16.591*** 17.106*** (0.095) (0.107) (0.074) (0.071) 588 0.124 29.788 0.000 588 0.058 12.220 0.000 588 0.009 0.832 0.436

Observations 588 Adjusted R-squared 0.083 F-Test: exp exp2 18.549 Prob > F 0.000

Observations Adjusted R-squared F-Test: exp exp2 Prob > F

Robust standard errors in parentheses. *** p < 0.01.

Robust standard errors in parentheses. ** p < 0.05. *** p < 0.01.

308

B. Chapman, A.Y.C. Liu / Economics of Education Review 37 (2013) 298308 Chapman, B., & Lounkaew, K. (2011). The effects of different loan schemes for higher education tuition: An analysis of rates of return and tuition revenue in Thailand. Higher Education in Europe, 34(2), 211226. Chapman, B., Lounkaew, K., Polsiri, P., Sarachitti, R., & Sitthipongpanich, T. (2010). Thailands student loans fund: Interest rate subsidies and repayment burdens. Economics of Education Review, 29(5), 685694. Chapman, B., & Sinning, M. (2012). Reforming the German student loans system. Education Economics http://dx.doi.org/10.1080/09645292. 2012.729327 Chapman, B., & Suryadarma, D. (2013). Financing higher education: The viability of a commercial student loan scheme in Indonesia. In Daniel Suryadarma, W. Gavin, & Jones (Eds.), Education in Indonesia (pp. 203 215). Singapore: Institute of South East Asian Studies. Dynarski, M. (1994). Who defaults on student loans? Findings from the National Postsecondary Student Aid Study. Economics of Education Review, 13(1), 5568. Firpo, S., Fortin, N. M., & Lemieux, T. (2009). Unconditional quantile regressions. Econometrica, 77(3), 953973. Friedman, M. (1955). Capitalism and freedom. Chicago: University of Chicago Press. Gross, J. P. K., Cekic, O., Hossler, D., & Hillman, N. (2009). What matters in student loan default: A review of the research literature. National Association of Student Financial Aid Administrators, 39(1), 1929. Machado, J. A. F., & Mata, J. (2005). Counterfactual decomposition of changes in wage distributions using quantile regression. Journal of Applied Econometrics, 20(4), 445465. Salmi, J. (2003). Student loans in an international perspective: The World Bank experience, Working Paper No. 27295. Washington, DC: The World Bank. Schwartz, S., & Finnie, R. (2002). Student loans in Canada: An analysis of borrowing and repayment. Economics of Education Review, 21(5), 497 512. Shen, H., & Ziderman, A. (2009). Student loans repayment and recovery. Higher Education, 57(3), 315333. Social Republic of Vietnam. (2007, September). Decision on Credit for Disadvantaged Students (No. 157/2007/QD-TTg). VietNamNet. (2008, October 6). School tuition fee system revamped. Viet Nam Newshttp://english.vietnamnet.vn/education/2008/10/807128/. Woodhall, M. (1987). Establishing student loans in developing countries: Some guidelines. Education and Training Series Discussion Paper EDT No. 85. Washington, DC: World Bank. Wooldridge, J. M. (2006). Introductory econometrics: A modern approach (3rd ed.). Singapore: Thomson South-Western. World Bank. (2009, June). Program document for the higher education development policy program: First operation (HEDPO1). Ziderman, A. (1999). The student loan schemes in Thailand: A review and recommendations for efcient and equitable functioning of the scheme. ADB Social Sector Program Loan, in the framework of the Education Management and Finance Study, Project, TA2996-THA. Ziderman, A. (2003). Student loans in Thailand: Are they effective, equitable, sustainable? Bangkok: United Nations Educational Scientic and Cultural Organization.

Table A8 OLS and unconditional quantiles regressions for females in rural rich regions. Variables exp exp2/1000 Constant (1) OLS 0.069*** (0.025) 1.4691* (0.001) 16.075*** (0.175) 172 0.167 9.477 0.000 (2) Q25 0.069*** (0.021) 1.4862*** (0.001) 15.833*** (0.133) 172 0.157 7.805 0.001 (3) Q50 0.027 (0.018) 0.0804 (0.001) 16.381*** (0.135) 172 0.183 1.102 0.335 (4) Q75 0.013 (0.014) 0.213 (0.000) 16.669*** (0.085) 172 0.132 0.540 0.584

Observations Adjusted R-squared F-Test: exp exp2 Prob > F

Robust standard errors in parentheses. * p < 0.1. *** p < 0.01.

References
Adams, S. (2004, April 9). A taxing job: IMF advice on tax policy in Vietnam. Hanoi: IMF Resident Representative Ofce in Vietnam.http://www. imf.org/external/country/VNM/rr/sp/040904.pdf. Barr, N. (2003). Financing higher education: Lessons from the UK debate. Political Quarterly, 70(3), 371381. Baum, S., & Schwartz, S. (2006). How much debt is too much? Dening benchmarks for manageable student debt Washington, DC: The Project on Student Debt and the College Board. Buchinsky, M. (1998). Recent advances in quantile regression models: A practical guideline for empirical research. Journal of Human Resources, 33(1), 88126. Chapman, B. (2006). Income contingent loans for social and economic progress. London: Routledge. Chapman, B. (2013). Higher education nancing and inequality. In W. Dobson (Ed.), Human capital formation and economic growth in Asia and the Pacic. New York: Routledge. Chapman, B., & Lounkaew, K. (2010a). Income contingent student loans for Thailand: Alternatives compared. Economics of Education Review, 29(5), 695709. Chapman, B., & Lounkaew, K. (2010, November). Repayment burdens with US college loans. Centre for Economic Policy Research Discussion Paper No. 647. Australian National University.