Why university student debt cancellation is a bad policy

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In the last year, I have traced news articles and statements by Members of Parliament urging for the waiver of loans owed by students to the Higher Education Loans Board (HELB) in Kenya. Their argument is that most of these students are unemployed and therefore unable to make regular payments required of them.

While it is difficult to judge what the majority taxpayers think about this issue, the idea seems to have the sympathy of many who consider these students as victims of a poor economic management which has delayed their ability to start their careers.

To start with, the Higher Educations Loans Board (HELB) lack adequate resources to enable it respond to the needs of applicants who wish to take tertiary education in Kenya. Demand for new loans is growing faster than the financial resources that Parliament permits for the institution and this means that the sustainability of the fund must come from more aggressive recovery of loans and better follow-ups with graduates. Against this background, it is impossible to waive all loan payments and ensure the survival of the institution.

Education access in Kenya varies with the level and extent of government funding. A 2016 study by the Institute of Economic Affairs revealed that government’s spending on primary school education in Kenya has the best reach for all income groups, with a majority of students being from the lowest income groups. Public spending in secondary schools was more heavily tilted towards the top 40 percent of income earners who occupied nearly 60 percent of available spaces in public education facilities. On the other hand, university education in public institutions was the least accessible to the poorest Kenyans owing to the fact that virtually 80 percent of all spaces were occupied by students representing the richest income quintile.

Thus the waiver of the loans for graduates would mostly benefit this richest group and would be an unfair and stealthy redistribution of income at the expense of their peers who did not receive the benefit of state-funded university education. This policy to waive loans for unemployed university students would mean that their peers with a lower income and who work in less secure jobs would be subsidising privileged people who have had multiple advantages conferred by state spending. A policy measure that redistributes the burden of taxes from the middle class and upper class towards the lower income classes is unjust and should not have as broad public support as I detect here.

Separate from the fact that waivers would be unfair distribution of income between groups of people, the waiver policy does not solve any economic problem beyond personal relief to the debtors. This is because this waiver being advocated for by some parliamentarians would reduce the future income for the HELB. As a consequence, the fund would shrink proportionately and have less resources to support its main mission. That means that either fewer students would be supported in the future but also that Parliament would have to replace this income by passing higher taxes to be used to fill that gap created by waivers. In other words, there are no wins to anyone else but these graduate students.

Neither the HELB nor these graduates in debt have a direct solution to the problem of unemployment. That stated, it is possible for the HELB to diffuse the tension with its debtors by providing an opportunity for the tenure of the debts to be extended before the student debtors get jobs. This is sensible because most of these students have relatively high prospects of getting jobs in the medium term and should begin to repay their loans at that time. This approach provides a temporary solution to the problem while allowing the HELB to maintain the viable loans in its asset books.

It is a fact that the advocacy for waiver or forgiveness of loans owed by unemployed graduates is not only a Kenyan phenomenon. The irony about widespread debt waivers is that the most educated generation for Kenya that should be prepared to make its contributions without the sense of entitlement are prepared to live at the expense of their poorer peers. Debt forgiveness as required would be an atrocious policy with no positive results except to render the HELB bankrupt, worsen inequality and raise taxes rates for Kenyans.

While the reform of the Higher Education Loans Board (HELB) is necessary in order to align its institutional design to the increased demand for tertiary education, the idea that students should be relieved of their obligation to repay their loans would be a completely unwise policy.

Kwame Owino is the chief executive officer of the Institute of Economic Affairs (IEA-Kenya), a public policy think tank based in Nairobi.

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