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Sharia-compliant student loans: the perspective from Australia

  • 25 January 2016
  • By Conor King

This week’s guest blog comes from Conor King, Executive Director of Innovative Research Universities, which is an Australian ‘network of six comprehensive universities conducting research of national and international standing.’

Conor looks at one long-standing commitment of the UK Government, which was repeated in the recent higher education green paper: to introduce Sharia-compliant student loans. He builds on HEPI’s previous work comparing the UK and Australian higher education funding systems by drawing some sharp distinctions between how the two countries deal with the same challenge.

The UK Government’s green paper Teaching Excellence, Social Mobility and Student Choice from November 2015 includes a section on Alternative Finance (pp.40-41) and proposes a Sharia-compliant loan to parallel the standard income-contingent loan.

This is an interesting option from an Australian perspective.  We have led the widespread use of income-contingent loans in higher education but this question of a loan not being consistent with religious or ethical positions has not come up. The main concern is that individuals may be so debt averse that the income based repayment would still not remove the deterrence effect of a charge.

As I understand the Alternative Finance issue, the question is whether an individual would be supporting the making of a profit from a loan through interest payments.

The Australian Higher Education Loans Program (HELP) includes no ‘interest’ payment merely an annual adjustment to the debt outstanding in line with inflation.

The Australian Government’s guide for students says:

There is no interest charged on HELP debts.  Your accumulated HELP debt is subject to indexation, which is applied on 1 June each year to maintain its real value by adjusting it in line with changes in the cost of living (as measured by the Consumer Price Index (CPI) figure released in March).

It has been quite an achievement for the system that the indexation is not considered interest, nor indeed was there much focus on it until 2014.

In its May 2014 Budget, the current Australian Government opened up the question by proposing that the indexation factor should be changed from the Consumer Price Index to the Government’s long-term bond rate for borrowings as part of a reform package. The change would notionally have reflected the cost of borrowing the funds the Government then advances for students’ higher education fees.

Opposition to the change in indexation was strong and it was conceded as soon as the Government attempted to negotiate its package through the Australian Senate. The proposal was clearly one that the then Minister was happy to lose.

Hence the HELP system remains one in which the Australian Government seeks to minimise its loss from the loans, not make money from it. That indeed is a characteristic of income-contingent loans.

However, the debate alerted Australians to the fact of an annual increase to the debt and that the Government could change the terms of repayment.

Another factor important in Australia is that the Government makes the loan and receives the repayments. Options to sell the loan book have never been taken seriously: where that occurs, then the issue for students of supporting profit-making from financial instruments would be stronger.

The Australian Government is now formulating its third version of changes to higher education with a core inclusion that greater flexibility in fee setting is required if universities are to have the resources they need.

One of the challenges to permitting higher fees, particularly if there is no upper limit, is that the loan subsidy from HELP can only rise as individual debts grow and the proportion repaid drops.

The option of a loan fee targeting especially high fees and hence Government risk may be reconsidered.

It currently applies, at 25% of the loan amount, only to undergraduate students paying fees to the set of non-funded Australian higher education providers that sit outside the funded system of largely Government established universities.  The ‘loan fee’ is roughly intended to offset the greater risk to Government from the higher fees, and hence student debt, in the non-funded sector.

Whatever the final outcome is it is almost certain that Australian students will continue to receive a benefit from the loan at a cost to Government. No one will be making a profit from them.


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