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In recent decades an increasing number of countries and institutions throughout the world have introduced student loan schemes in order to widen access to higher education. Student loans have thereby become an important funding instrument in some higher education systems.
However in Europe where public grants are available to students in almost all systems state-guaranteed student loans play an important role only in some. Whereas student loans are in high demand for example in the UK the Netherlands and the Nordic countries 26 out of the 43 European higher education systems surveyed by Eurydice either do not offer them or report less than 5% of students using them. Moreover despite a commitment during the 2005 Bologna Process Ministerial Meeting in Bergen and in several of the following Bologna Communiqués data confirms that loan portability meaning taking a loan at home and using it for studies abroad is still quite limited at least for degree mobility and especially in Southern and Eastern Europe.
This was a good reason to welcome the Erasmus+ Master Student Loan Guarantee Facility in 2015 an EU-guaranteed student loan programme with a maximum budget of 520 Million EUR managed on behalf of the European Commission by the European Investment Fund (EIF). The Facility is meant to help students access loans (for tuition and living expenses) under favourable terms and up to €18 000 to undertake a Master's degree programme in an Erasmus+ Programme Country other than the one where they reside or obtained their previous qualification. A financial intermediary – usually a bank or a loan agency - selects the future student and provides a loan at a competitive market rate while being covered by the EU guarantee in case of losses.
With the ambitious goal of providing 200 000 loans by 2020 this loan facility promised to promote cross-border degree study and portability of loans contributing to access to higher education by offering opportunities to those who could not afford to study abroad and who may not have been eligible for national student loan schemes – where available.
But so far the approach has had limited success: According to the evaluation prepared by ICF while 75% of the first loan takers (109 students) confirmed they would not have had an alternative approach to finance their studies abroad their total number remains low: By the end of 2017 only 428 students had opted for the scheme. This can be partly explained by the low popularity of and lack of tradition for study loans in some of the countries in particular in Southern and Eastern Europe and the existence of more attractive national student loan schemes in others mainly Northern Europe. Therefore the evaluation prepared by ICF concluded that the scheme “would address a market gap rather in Southern European and Central and Eastern European countries while being less relevant in Northern and Western Europe.”
The sluggish take-up is also attributed to the low interest of banks for which the scheme may not be lucrative enough. This is one of the reasons why the loan facility recently started to offer universities the possibility of becoming financial intermediaries. But still today the scheme is only available in nine countries. While the scheme’s conditions might not be attractive for banks they may also deter students. Undoubtedly at first glance some of the conditions of the Erasmus+ Master Student Loan Guarantee Facility are quite favourable to students: There is no collateral or parental guarantee required repayment starts only after a one-year grace period after the end of the Master’s programme there are no penalties for early repayment of the loan and importantly there is a reduced interest rate.
However looking at concrete cases the evaluation prepared by ICF found that some beneficiaries did complain about unfavourable interest rate levels. And indeed under the loan facility depending on the financial intermediary and the country of residence interest rates may be as low as 4% or as high as 21.27%. Higher than usual market rates are explained by the fact that the student does not have to provide any guarantee but this is not really a valid argument given the low risk due to the EU guarantee. This also seems to betray the original intention of the EU guarantee: to minimise the student debt burden. Consulting existing national student loan schemes in Europe most of them charge no or very low interest rates (usually under 1%).
Hence the scheme while well intended needs some urgent adjustments. First there should be better control over the interest rate charged by the financial intermediaries as according to the EU guarantee interest rates should be significantly lower than the market rate. Either the interest rate should be capped or the overall amount that students have to reimburse should have a ceiling (for example 1.2 times the amount of the loan).
Second financial intermediaries should be required to offer income-contingent repayment of loans depending on the graduate’s annual income to mitigate the risk to the borrower (meaning the student). This would also honour the commitment set by the EU on social inclusion for all its programmes including mobility measures.
Third the scheme should include a debt forgiveness programme meaning special circumstances under which the loan can be written off.
The European Commission has recognised that the scheme does not perform well and announced already in its 2018 mid-term review report: “So far however it has not yet lived up to volume expectations due to delays to its launch low take-up among financial institutions and a lack of awareness among students.” It also announced that it would reduce its annual budget allocations.
The related staff working paper states that the scheme “is missing the target by a high margin” and that “despite some progress made in the programme design it can be concluded that there is a certain dissonance between its ambition and actual project outputs specifically addressing the disadvantaged target population.” The paper also states that the scheme was “commonly found to be insufficiently tailored to address the needs of the disadvantaged who are risk averse to go abroad for a full Master programme or to take up loans even if repayments are not income-contingent.”
All these aspects should be closely studied as the European Commission is currently considering discontinuing the student loan facility under the Erasmus+ programme and offering a broader scheme targeting learners at all levels under the next Invest EU "Social Investment and Skills window". While transnational mobility would be a goal it would be optional and no longer a condition as under the present scheme. This new scheme is currently being tested in a new Skills & Education Guarantee Pilot under the European Fund for Strategic Investments. But as the scheme as such - offering loans through financial intermediaries - would be the same it is not really clear how this would bring the necessary improvements. Given the experience so far policy makers should think of an alternative.
Here is a proposal: EUA advocated already some time ago for the set-up of a trust fund with a real European outlook and dedicated to European mobility which would offer zero or low interest student loans coupled with grants and which would ensure equitable access and participation in higher education irrespective of one’s background. As a name for the programme “Monnet” is already taken. However other names come to mind that guarantee that this is not seen just as a means to allocate grants and loans but instead is about Europe’s future and its spirit. In brief it is about “Next Generation Europe”.
Michael Gaebel is Director of Higher Education Policy at the European University Association.
Luisa Bunescu is Policy Analyst in the EUA Governance, Funding and Public Policy Development Unit. She joined the Association in 2016, initially as Policy and Project Officer in the Higher Education Policy Unit.
