Affordability of tertiary education in Malaysia

Author: Iloka Benneth Chiemelie
Published: 25/12/2013

1 INTRODUCTION

From the works of Schultz (1971), Sakamota& Powers (1995), Psacharopoulos&Woodhall (1997), it has been stated that the theoretical framework responsible for adoption of education as a means of development is the human capital theory. In this theory, the provision of formal education is seen as a productive investment in human capital (Olaniyan&Okemakinde, 2008). There is a general consensus amongst economists that human capital is vital for increased economic growth and labour productivity in a country. Such investments in human capital include initial costs such as tuition fees and earnings forgone by the individual wile at school, and firms as well as the country’s hope to obtain improved productivity in the future from the individual with higher earnings.

There is a growth on new theories that have emerged to identify how government and private sector investments can be used to increase economic growth through increased growth in human capital, physical capital, technological competencies and intellectual capital. In accordance with the growth theory, the excess of education is the necessary ingredient for sustainable economic growth (Blundell, R., Dearden, L., Goodman, A& Reed, H, 2000). This is because, human capital is capable of creating positive effects on the long-term growth of an economy (Rebelo, 1991), and Barro (1991) and Barro& Lee (1994) supported this idea by stating that economic growth and productivity in the global environment is positively influenced by human capital growth.

As such, it can be stated that education should be the main priority for the Malaysian government as it will help to enhance productivity and ensure sustainable growth in the country’s economy. However, the question is how the education system should be finance. In Malaysia, people have different options of how to finance their education such as personal income, sponsorship, loan or scholarship. 

Therefore, the purpose of this paper is to determine the best amongst scholarship and study loan is. In order to achieve this task, literatures from past theories will be used to support individual opinion and debate. The question will be answered in terms of the financial system’s efficiency and equity level. Thus, this paper is divided into four sections. The first section is the literature review on high educations and means of financing them in Malaysia. The second section is a comparative debate between study loans and scholarship. The third section illustrates the cost-recovery mechanism for loans in Malaysia, while the final section is recommendation on the best approach for financing higher education in Malaysia.

2 LITERATURE REVIEW

2.1 ROLE OF TERTIARY EDUCATION AND COST

The main role of tertiary education is to meet a nation’s human resource needs for socioeconomic development (Lindong, 2007; Aafaq, 2007). Higher education which is also known as tertiary education is defined as a course that leads to an award of a degree, and post graduate diplomas (Gupta, 2008; Middlehurst&Woodfield, 2004, p. 8). Over the last two decades, the number of students in higher institutions across the world has more than doubled from 40 million in 1975 to more than 80 million in 1995, and this figure is expected to be way above 50 million by 2025 (TheWorld Bank, 2000). The trend for enhanced human capital is most common in certain developing countries of South East Asia and Latin America. Malaysian is a South East Asia country. Marjik (2003) also reported that as a result of the increased demand for high education, some countries are not able to meet the demand for higher education.

In Malaysia, Higher education is still remains an important development factor (Samuel J.,Srikamaladevi M., Saravanan M., &Murali R., 2011). It is important that the demand for higher education is satisfied for all Malaysians (Yahaya& Abdullah, 2003). In recognition of this need, the government of Malaysia detailed out the challenged it is facing in relation to providing adequate higher education in the Seventh and Eight Malaysia Master Plan (Samuel J.,Srikamaladevi M., Saravanan M., &Murali R., 2011). The first issue identified by the government was how to increase access and maintain standards for higher education (UNESCO, 2006). This is because there have been an increase in enrolment in the public tertiary education institutions since 2000.

As a result of the increase in demand for higher education, it is now difficult for any country to meet the dreams of students and their sponsoring families (Karmokolias& Maas, 1997). This increase in demand now means that public universities in both developed and developing nations are either unwilling or unable to accommodate all students that seem admissions per annum (Patrinos, 2000). This issue has effectively created crisis in affordability of higher education (Morgan-Klein & Murphy, 2002, p. 64). As such, access and affordability of higher education is still a diverse issue and challenge in Malaysian higher education (Hassan, 2002). Many students in Malaysia find it difficult to get admitted into public institutions because of the limited spaces available for admission (Samuel J.,Srikamaladevi M., Saravanan M., &Murali R., 2011).

At this point, the role for private institutions to increase access to tertiary education must be recognized (UNESCO, 2006; Altbach, 2004; Hauptman, 2003; Morgan-Klein & Murphy, 2002). Private higher education is characterized by the application of marketing principles in management and operations of these institutions, which may or may not be accorded any financial support by the government. As such, the objectives and functioning of private institutions is likely to be different from public institutions (Gupta, 2008). Presently, 30 percent of the students aged 17-23 enrol for tertiary education in Malaysia and the government has set the enrolment rate to be 40 percent as of 2010. Additionally, the Ministry of Higher Education has also set the target to be only 1.6 million open places in tertiary education as of 2010 (Samuel J.,Srikamaladevi M., Saravanan M., &Murali R., 2011). However, private institutions are still relatively higher than public institutions, and this should not be confused as an escape route for students to gain higher education. In that case, the issue of affordability is of education is still lingering around. This issue will be tackled in Malaysian context below.

2.2 THE AFFORDABILITY OF EDUCATION IN MALAYSIA

Samuel J.,Srikamaladevi M., Saravanan M., &Murali R(2011) there are little studies on the affordability of tertiary education in Malaysia. However, there are many studies on related tertiary education issues in Malaysia. The National Higher Education Research Institute (NHERI) is the body responsible for undertaking higher education policy researches for the Malaysian Ministry of Higher Education. The body was established in 1997, and it has carried out more than 40 different studies on higher education, but only two studies was carried out on the issue of affordability of higher education and none of them was direct on the issue. Instead, indirect questions such as what should be the cost of higher education were asked.

No matter the case, the above arguments show that understanding the cost of high education is necessary because it will help to developed strategies to make education accessible and in the other hand, increase productivity and economic growth in the country. In response to the importance of accessible higher education, both scholarships and study loans are issued to students to undertake their higher education. However, the question is whether study loan as its becoming more popular than scholarships is in essence more efficient and effective. This question will then be addressed below.

2.3 SCHOLARSHIP OR STUDY LOAN? WHICH ONE IS BETTER?

In many countries, financing higher education has been possible through numerous cost sharing methods such as student loans and scholarships. The student loans are beginning to replace the traditional trend of grants and scholarships. As Alphonse (2012) argued, the importance of loan takes three main trends. The first is that in countries where student loans have been explored for long period of time, the demand for loan support has been increasing with a subsequent increase in school fees and living expenses in the country. Although there might be individual differences, most of the students in these countries such as Malaysia get a larger sponsorship of their education through loan.

The second trend is a product of limited public fund and growing need for private returns on higher education. As a result, student loans are being introduced in countries where they were not previously adopted. The third trend is the use of student loans to replace grants and scholarships as is experienced in Malaysia. Understanding the third trend is the main purpose of this paper.

However, the idea of borrowing for learning is in contrast with the traditional system of grants and scholarship; and has raised numerous arguments amongst economists of education (Woodhall, 1987a and b; Woodhall& Barr, 1989). For instance, Barr & Crawford (2005) is of the notion that the provision of student loans to replace scholarship is better in terms of equity and efficiency. This paper will be in support of Bar & Crawford’s (2005) idea that student loan should be made to replace scholarship because:

2.3.1 EQUITY ARGUMENT

Equity in essence can be defined as the degree of fairness and justice. In this contest, it will be viewed as the extent in which student loan can be considered as being fairer than scholarships in financing higher education. Basing the argument on the word “fair”, it can easily be stated without further debate that student loan is fairer than scholarship because it offers equal opportunity to everybody, repayment is easy, and it covers all courses till graduation.

In Malaysia, student loan schemes such as MARA loan and PTPN offer students equal opportunity to obtain higher education. This is because; any qualified candidate can apply for the loan and use it to sponsor his or her higher education. This is better than scholarship because scholarship does not offer equality opportunities to everybody, but instead focuses on specially gifted and talented students, or a set of people within certain demographic dispensation such as (race, state or social status of their family). This is totally unfair as some of the students who might actually be gifted cannot easily be noticed in such a scheme. Student loan solves this problem by giving every student the opportunity to further their education.

Secondly, student loans incur low interest and sometimes no interest rate. In government’s bid to subsidize education, student loans incur a relatively low interest rate and in some countries there is no interest rate on student loans. Considering the fact that it offers equal opportunity for all qualified applicant, this becomes an added advantage as students can be less worried about high interest rates that are normally associated with other forms of loan. In essence, student loan gives another hard blow to scholarship as a means of financing higher education in the sense that students can be sure that interest rates won’t be a hindering factor to such approach.

The last but not the least for this debate is the fact that loans cover all courses throughout the students’ course of study. Unlike loans, scholarships can be offered to cover only certain subjects or for certain semesters or with elapse of the allocated fund depending on the contractual agreement. Student loans are far better than scholarships because they cover all the courses and as such guarantee students of gaining higher education. The limitation of scholarship in this area makes it less significant as a means of sponsoring higher education because if a student doesn’t have the necessary funds to cover up for the courses or semesters not covered by the scholarship, the student will eventually end up not completing the course and the gained skills will not be regarded in the society because there is no certificate to prove the student’s competency in that field.

From the above arguments, it can be seen that the option of adopting student loan as the main source for funding higher education in place of the traditional grants and scholarship scheme is better because it makes education highly accessible to all qualified individuals in the society. Therefore, there should be little equity debate on this issue because student loan is better than scholarship in the sense that it’s for all members of the society, incurs little or no interest rate and covers the whole courses taken by the beneficially.

2.3.2 EFFICIENCY ARGUMENT

Efficiency on the other hand is considered as the degree to which something is used for the actual purpose it is meant to be used. In the literature review, it was stated that the Malaysian government is currently facing the challenges of how to handle the high number of people desiring to enrol into higher institutions, and that education is necessary for maintaining the economic growth and productivity of a country. In this case, efficiency is described as the rate to which the loan (monetary investments) issued by the government is being used for the purpose of education.

Unlike scholarships and grants, loans are usually issued by financial institutions such as banks that closely monitor the extent to which the money is being used for the purpose it is meant for. In the case of student loan in Malaysia, they are issued by banks and paid directly into the school account to cover the students overall courses. Since the transaction is between the school and the bank, there is no doubt to the fact that student loans are being efficiently utilized. The only obligation the beneficially has is to attend classes and complete the courses.

Secondly, repayment is done between the beneficially and the bank after graduation. Once the beneficially has a job, the loan will then be paid back gradually based on agreed terms and conditions. There are also some other features such as government subsidy designed to ensure full payment in the case where the student finds it difficult to get job after studies or dies before the completion or after studies without repaying the loan. Therefore, such program by the government means that financial institutions and other agencies are willing to help finance higher education of qualified people in the society.

Finally, another area where loans are more efficient than scholarship is the ease at which it can be obtained. Student loans are easily obtainable in Malaysia by simple application than scholarships which require rigorous process and tests. In order to get access to student loan, all the applicant needs to do is go to the nearest loan office, fill out the form with his details and the details of the school and wait for approval. This is fast, easy and more convenient as the loan offices are usually assessable. Therefore, it can be seen from this argument that loans are more efficient than scholarship in the sense that scholarship lacks the qualities of loans as discussed above.

From the equity and efficiency debate presented in this paper, it is hoped that people will now become clearer about the reason why this paper adopts the notion that student loan should replace scholarship as a means of fundinghigher education because students are easily accessible, available for all qualified people in the society, subsidized by the government, covers the total duration of a course and easy to be applied for.

2.4 SUPPORTS FROM INTERNATIONAL EXPERIENCE

Maureen (2004) in review of his international experiences after helping governments across the globe to draft means for making education accessing present favourable argument for loans based on both efficiency and equity. The efficiency argument is of the notion that loans are better than grants because:

1.      They reduce demands on government budget and on taxpayers – this is true because the availability of loan means that the government doesn’t need to make extra budgeting for financial higher education, and taxes will not be increased in order to meet such demands.

2.      Provide additional resourced that will be used to finance the expansion of higher education and widen access to education – this is also true because the availability of loan as discussed in above is done through bank to school policy, and the schools can use the money to broaden access to education and develop their system to ensure a more efficient academics unit.

3.      Increase students’ innovation by making them aware of the cost of higher education, and helping them to evaluate the cost and associated benefits of such loans in relation to repayment – just like the two arguments above, this is true because during the process of issuing the loan, the students are well briefed on the terms and conditions for repayment, and as such, students who think they can’t meet such terms will seek innovative ways of paying their school fees such as studying part-time and working at the same time.

On the other hand, equity arguments as also presented by Maureen (2004) based on international experience and comparison focused on costs and benefits, and is option the notion that since most of the university graduates can expect a substantially higher income because of their education, students who are benefits of higher than average earning should not be subsidized by taxpayers with an average or below average earning. This is justifiable because it will be unfair for employees who earn the same or less than the students working part-time to help in subsidizing the school fees of these students.

The debate on equity of loan as a means of funding education has found interest from World Bank and it is the bases of its three conclusions that:

1.      The great share of public resources is awarded to higher level of educations, and less to the lower level of education (World Bank, 1986, p. 10).

2.      Since higher education systems are being financed by the entire population and yet made available to only a small minority of the population, such finance has a regressive fiscal impact (World Bank, 1994, p. 23).

3.      The issue of cost-sharing cannot be solved equitably without a functioning student loan program that is designed to make funds available for all students who need to borrow in order to finance their education, and also a scholarship programs that guarantees necessary financial support to academically qualified poor students in the society (World Bank, 1994, pp. 46–47, 50).

While the efficiency argument in accordance to international experience can be fully supported, the equity argument presents room for debate. The debate of whether taxpayers should subsidize the loan of students who earn relatively higher than them or the same as them. The debate is in proposition that they should help in such subsidy act. This is based on the growth theory, in which it is expected that the students will one day get a job and also help in subsidizing the student loans of other people and the cycle continues infinitely. Therefore, such an argument should not be the reason why provision for student loan should be aborted in place of grants because the process is continuous and those being helped today will be helping others tomorrow in an infinite process of subsiding education.

The second debate is based on World Bank’s statement that for cost-sharing to be solved, there should be a functioning student loan program that makes funds available for all students who wants to borrow in order to finance their education, and also a scholarship program that guarantees necessary financial support to academically qualified students in the society. This statement is incomplete because; the word “borrow” is already applicable in cases where the student is academically qualified (finished high school) but doesn’t have fund to continue higher education. Additionally, while loan is broad and open to the whole society, scholarships are limited to specific number of people and specific periods in time. As such, the government can invest the scholarship funds into subsidizing education through loan and as such increasing the number of people going for higher education. On the other hand, the government can also use the money to address World Bank’s first issue that loans focuses on higher education by investing the funds into free education in lower education systems. As such, it can be seen that notwithstanding the arguments presented by World Bank, loan is still the right solution for financing higher education and making education highly accessible.

3 LOANS AS COST-RECOVERY MECHANISM FOR FINANCING EDUCATION IN MALAYSIA

In order to maintain sustainability of the academic system in relation to providing student loans for future generation, the present generation have to repay all money borrowed. Cost-recovery mechanism in this case can be defined as the ways in which sustainability can be ensured by make sure that all borrowed money are returned by the borrowers.

In this paper, PTPTN loan scheme will be evaluated. In accordance with PTPTN (2013), the repayment for student loan starts 6 months after graduation and the repayment is in as per student’s level of education as illustrated in the table below.

Table (1): PTPTN Education Loan repayment before 2003

However, the repayment mechanism was changed from 2004 and based on the education loan / financing amount as illustrated in table 2 below.

Table (2): Amount and D

The repayment period for recipients who receive offer of loan is converted from 3% to “Ujrah” 1% education financing based on the balance of the repayment period according to original agreement. This implies that if the student is not able to fully pay up within the expected repayment period, there is an additional 1% plus initial interest on outstanding bills. This is as illustrated in the table 3 below.

Table (3) Administration costs and “Ujrah” / Wages 

In order to ensure full repayment, the government of Malaysia has enacted numerous measures such as 20% discount for graduates who repay all their loans within one year, 10% discount per annum for borrowers who consistently make repayment within schedule.  Refsa.org (2013) stated that the federal government is currently able to collect only 50% of the dues owned by borrowers per annum. The issues behind such as highlighted by Refa.org (2013) are that: unemployment is high and graduates have other financial constraints such as car and housing loans; and data sitting in PTPTN’s loan management system is severely outdated and this have resulted in the government’s inability to fully trace the students who benefited much of the RM45.41 billion loans approved by PTPTN. Additionally, it is thought that by offering the discount, the government is actually rewarding those who have the means to repay but chose not to, and this argument is supported by the fact that since the reward scheme was introduced, 2962 borrowers have actually come to repay their student loans in full within a month (Refa.org, 2013).

From the above argument, it can be stated that the current cost-recovery mechanism adopted by the government is ineffective and doesn’t guarantee sustainability for the future generation. The reason behind such statement is because:

3.1 The government can’t trace much of the people benefiting from the loan – it is poor to note that a country like Malaysia does not have adequate and advanced facilities to regulate the student loan issuance and the people whom they are being loaned to, as Refa.org in the statement above made it known that the government can’t trace much of the students benefiting from the 45.41 billion Ringgit loan.  If that is the case, much of the money spent cannot be recovered and it will put pressure on both the government and taxpayers, which will subsequently result in the abolishment or the program or reduction in budget. In essence, the access to education will be affected negatively.

3.2 Discount for loan payers and only 50% recovery rare – these two issues as discovered above creates insufficiency in the recovery system as the discount will mean that borrowers will not eventually pay up to the amount they borrowed because they have 10% discount for successful payment within the stipulated time. Additionally, the 50% recovery rate means that about half of the money invested by the government will not eventually get recovered in time or might even never get recovered. Thus, this creates a big issue of sustainability as under recovery of the associated costs will mean that the future generations will have little to survive with in terms of student loan for financing their education.

From the two supports above, it can be seen that a change in the cost-recovery mechanism adopted by the Malaysian government is important in order to guarantee a sustainable future of financing higher education in the country. This is important as it will help in maintaining and improving the human capital disposal in the country as the current mechanism is not built to guarantee such.

4 PROPOSED FORM OF STUDENT FINANCIAL SUPPORT FOR TERTIARY EDUCATION IN MALAYSIA

From the equity and efficiency argument, numerous factors were determined to be in favour of adopting loan instead of scholarship as a means of financing higher education in Malaysia. These factors were based on both personal review and international experience review. Thus, student loan is the proposed form of financial support for tertiary education in Malaysia. This is because:

1.      Student loans cover all courses to be undertaken by the student instead of the part covering mechanism of some scholarships.

2.      Students loans are easy to obtain by just moving to the nearest offices and signing up for it, which is better than the rigorous process and tests associated with obtaining scholarship.

3.      Student loans can be obtained by any qualified individual, which is better than scholarships designed to cover the financial support for only gifted individuals.

4.      Student loan reduces pressure on government budget and taxpayers because students are sourcing their education themselves.

5.      Student loan makes the students innovative as they are made aware of the terms and conditions associated with such offers and students who are not capable of meeting such terms or don’t like the terms can find other innovative ways of sourcing their school fees such as working part-time while studying.

6.      Student loan also provides the financial support for expanding the education system and making education accessible because with student loan, the number of enrolment is highly increase and the money generated can be used for providing a more effective and efficient academic system that is highly accessible.

The current cost-recovery mechanism adopted by the Malaysian government in the case of PTPTN loan as discussed above is effective and doesn’t guarantee sustainability of the system. Therefore, it is recommended that the government should ensure sustainability by improving their recording system and security measure to ensure that all students benefiting from the loan are traceable. Additionally, the creation of job opportunity is also important to help provide graduates with the necessary funds to repay their debts. The third recommendation is that the Malaysian government should review the reward measures as it puts pressure on government budget and taxpayers.

5 CONCLUSION

It must be acknowledged that this paper has been able to meet the objective of debating on whether student loan is more efficient and effective than the traditional method of scholarships and grants, evaluating the performance of cost-recovery mechanism adopted for any student loan in Malaysia and its effect in sustainability of the academic system, and proposing the form of support for financing higher education in Malaysia.

In the course of meeting these objectives, the paper has been successful in discussing the affordability of tertiary education in both Malaysian context and on other countries across the globe, as well as Malaysian and global governments’ efforts to make education accessible in their countries. One of the most significant discoveries is that human capital is essential for maintaining productivity and increased economic growth in a system, making the support for higher education by the government very important.

In this paper, the argument was vividly in the favour of student loan as scholarship was associated with numerous limitations while student loan offered those features neglected by scholarship. However, it was also discovered that the current cost-recovery mechanism adopted by the Malaysian government does not guarantee sustainability because it has numerous weaknesses such as outdated data recording system, inability to trace all students benefiting from the loan, and low collection rate. Thus, it was recommended that the Malaysian government should review these issues and design more effective and efficient means of ensuring that sustainability is created through improved cost-recovery mechanism.

In conclusion, it has to be stated that the Malaysian government and governments of other countries should never neglect the importance of making education highly accessible in their country because, it helps in development of human capital which will directly influence productivity and economic growth in the country positively. It also has to be stated that loans should be chosen as the preferred option for such support in place of grants and scholarships because it makes funds highly available to all qualified individuals which is better than the selective mechanism adopted by grants and scholarships.

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