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RESEARCH PRODUCT

Financing public higher education in developing countries : the potential role of loan schemes

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The financing of education has emerged as a major topic of discussion among policy makers in recent years. There is evidence that in many developing countries, governments can no longer continue to increase spending on education at the high rates characteristic in the 1960s and 1970s. The macroeconomic environment has worsened, and there is keen intersectoral competition for public funds. Thus unless educational development moves away from its present heavy dependence on public funds, the expansion of education would be frustrated. One policy option is to increase the private financing of education. In this paper, we evaluate the potential effectiveness of loans schemes as a cost recovery instrument in higher education. Essentially, loans permit students to finance the cost of their education from future income. So the effectiveness of loans would depend on the relation between costs and students' future income. It also depends on the incidence of repetition, dropout, and default, as well as on whether or not a grace period is incorporated in the loan scheme. Our simulations show that in Asia and Latin America, the potential rate of cost recovery is substantial under what appears to be bearable terms of repayment. In Francophone Africa and Anglophone Africa, however, loans schemes are unlikely to perform as well, but they would still permit a shift toward greater private financing of higher education.