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EU-guaranteed student loans: A means to enhance international degree mobility?

22 September 2020 | Luisa Bunescu, European University Association | Michael Gaebel, European University Association

As part of the Erasmus+ programme, the European Union launched the Master Student Loan Guarantee Facility in 2015. At the time, it was fresh and ambitious, but certainly not uncontested. However, it has not received much public attention since. Now, with the next generation of programmes about to start, loan facilities are destined to play a bigger role – but not under Erasmus+. EUA experts Luisa Bunescu and Michael Gaebel look at the lessons learnt and provide some ideas for future implementation.

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”.