ERASMUS MASTER - AN EU STUDENT LOAN GUARANTEE …



ERASMUS MASTER - AN EU STUDENT LOAN GUARANTEE FACILITY

non-paper for education committee of the council

1. Why an EU student loan guarantee facility?

Higher education (HE) is a driver of growth recognised in the Europe 2020 strategy by the headline target on educational attainment (40% of 30-34yr olds by 2020). Encouraging learning mobility is a key priority of the EU, as reflected in the Bologna process agreement that 20% of HE students should be mobile by 2020 and agreed by EU ministers in the context of the Education and Training 2020 strategic framework.

An independent feasibility study[1] has confirmed that there is a market gap in respect of the availability of financial support for full-programme cross-border studies, notably at the masters-level. Student loan schemes exist in many Member States, either at national or regional level, but there is no full coverage across the EU. Many place significant restrictions on their accessibility and/or portability[2], and in some cases, the modest levels of support available are insufficient for 'mobile' study. Furthermore, the study noted that whilst mobility is in the interests of Member States collectively, the lack of widespread/EU availability may result in a negative incentive whereby individual Member States rely upon the loan schemes of other countries where these exist. Bank loans are difficult to obtain because students usually do not have collateral against which to secure a loan, making the risk premium prohibitive – particularly when the borrower proposes to study abroad. The problem is particularly acute for Masters level students wishing to complete a full degree programme in another Member State who face higher costs due to the length of study period and have lower access to finance (grants and/or loans).

An EU student loan facility for cross-border learning mobility would have clear EU added value to address an identified market gap, and should not duplicate or displace financing available at the national level. The facility would not intervene to support purely domestic studies or to finance credit moblity –where more opportunities for financial support already exist. The Facility will be part of a range of EU financial support instruments for higher education mobility, including grants (Erasmus and Marie Curie).

2. Where can EU resources make most impact?

Even with a closely defined target group such as mobile Masters[3] students, providing the full capital for loans directly from the EU budget would be too financially onerous and require a high level of administration at the EU level –or even a new EU Agency –to distribute loans and collect repayment.

It is therefore more realistic for the EU to act as a guarantor against the possible default on loans, which would be disbursed by financial intermediaries, funded from private sources (essentially banks or student loan agencies). This EU guarantee will offset some of the risk of potential non-repayment by students and thus make lending viable to banks at a level affordable for students. The first losses from any non-repayment of loans would be subsidised from EU resources, up to an agreed limit.

The leverage effect for a potential EU student loan (ie. the total value of loans that could be available from participating banks) has been estimated at between 6 and 8 times the EU contribution. In this way, the Erasmus Master student loan guarantee would be able to support many more mobile students at a higher level of intervention than is possible with Erasmus grants (on average €1,000 for one academic semester).

The Erasmus Master Student Loan Gurantee is additional to, and could be combined with, Erasmus grants for credit moblity (eg. a student could use an 'Erasmus Master' backed student loan to undertake a Masters programme abroad and an Erasmus grant to complete some modules in a different country).

3. How could an EU student loan guarantee fund operate?

An EU student loan guarantee fund would be established within the framework of the planned EU Debt Platform[4] within the post-2013 Multiannual Financial Framework.

Financial institutions at national/regional level would act as the direct contact point with potential borrowers, disbursing loans and collecting repayments. These would be selected to participate following an expression of interest procedure by a selected entrusted entity, possibly the European Investment Fund.

Repayment of loans would be via 'normal' bank loan mechanisms. If a graduate defaults on the loan, the financial intermediary would apply to the EIF for part-reimbursement. The cost of the default would be shared between the Financial Intermediary and the European Student Loan Guarantee (EU contribution). The level of risk-sharing should be sufficiently attractive to the financial intermediary in order to secure their participation, but should not lead to moral hazard (ie. financial intermediary should not find it easier to recover the money from the EU contribution than pursuing the graduate borrower to repay). Graduates are incentivised to pay via an ongoing relationship with their financial intermediary which continues to pursue reimbursement. Any eventual loss recoveries (if loan repayments are resumed) will be shared between the Student Loan Guarantee Facility and the Financial Intermediary pro rata to the Guarantee Rate. The appropriate level of risk sharing is being informed by ongoing pre-market testing with financial institutions, undertaken by the EIF on the European Commission's behalf.

Re-financing could also be made available by the EIB, on condition that the advantage of access to lower cost capital is passed on to the student borrowers.

The diagram below illustrates the possible architecture of a European student loan guarantee facility. [pic]

4. Key characteristics of an EU student loan guarantee facility

o Target group: EU resident students undertaking Master's level higher education[5] - one or two years.

o Studying in an EU Member State, candidate or EFTA country other than their country (EU, candidate or EFTA) of permanent residence.

o Indicative loan size: up to €12,000 for a one-year Masters programme and up to €18,000 for a two year Masters programme per student (to provide a sufficient contribution to the costs of tuition and living expenses, yet keep debt levels manageable for the individual borrower).[6]

o Repayment based upon a model which provides safeguards for the lowest earners ie 'mortgage-based' standardised payments with a provision for deferred repayment of up to 24 months, based upon an initial grace period following completion of the studies (up to 12 months) and a payment holiday in case of change of circumstances (up to 12 months over the lifetime of the loan) plus interest deferral (in order to avoid hardship) – repayment periods would typically be approx 15 years. This approach ensures a strong social dimension – via combining affordable repayment mechanisms with the absence of a need for collateral or parental guarantee, which is a barrier to securing loans in particular for students from lower socio economic backgrounds who do not have personal or family resources to call upon.

o Students would apply via a participating Financial Intermediary (normally based in their home country)

o Number of students that could benefit: the intention is not to finance all Masters students taking their degree abroad, or even to satisfy the full-demand. The scheme will incentivise mobility, but within the limits of the budgetary resources available for this action and taking account of the need to start modestly. By way of illustration, an average of €100 million per year from the EU budget could generate loans totalling at least €600 million per year, representing around 43,000 borrowers. Given the need to build up awareness of the possibilities among prospective students and financial intermediaries, it is proposed to set aside €30 million for this action in the first year and to grow year-on-year thereafter to reach a level of €180.27 million by 2020.

Further information is available in the 'Erasmus for All' programme proposal Impact Assessment - SEC(2011) 1402 final

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[1] Independent (LSE) feasibility study on student lending – final report

[2] Even in countries where portable support exists or finance is open to non-domestic students restrictions are common eg. whether for tuition cost or living cost, duration of residence requirement, available only for courses approved by home authorities, valid for partial studies only, available only if course is not available in home country

[3] Estimated at more than 300,000 students per year

[4] COM(2011) 662 final

[5] as per Bologna definition, and including both academic and vocationally based masters level studies

[6] See feasibility study for data on costs by country

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