Review of Non-means-tested Loan Schemes

The Government is reviewing the operation of the Non-means-tested Loan Schemes for persons pursuing post-secondary and continuing education.  You are invited to give your views.  Check out here for the essential facts and information and how to send us your views and comments.

Review of Non-means-tested Loan Schemes

The Government is now reviewing the operation of the Non-means-tested Loan Schemes administered by the Student Financial Assistance Agency (SFAA) for persons pursuing post-secondary and continuing education.  

Phase one of the public consultation on the Review of the Non-means-tested Loan Schemes has ended.  We are collating views collected and will draw up proposals for further public consultation under phase two of the Review.

If you are interested to know more about the Non-means-tested Loan Schemes, please read the following passage or click here http://www.sfaa.gov.hk/eng/schemes/nls_index.htm to browse the homepage of the Student Financial Assistance Agency.

Education and student financial assistance
In 2009-10 financial year, Government’s estimated recurrent expenditure on education exceeds $53 billion, accounting for about 23% of Government’s recurrent expenditure of the year.  Of $53 billion, about 25% (about $13.5 billion) is for higher education.

To ensure that no student should be denied access to education due to lack of means, SFAA administers various student financial assistance schemes.  As far as post-secondary education is concerned, SFAA administers two means-tested financial assistance schemes for full-time post-secondary students (i.e. Tertiary Student Finance Scheme – Publicly-funded Programmes and Financial Assistance Scheme for Post-secondary Students) to provide to eligible students non-repayable grants to meet tuition fees and academic expenses and low-interest loans to meet living expenses.  In addition, SFAA administers non-means-tested loan schemes for these post-secondary students and other students pursuing continuing education.  Eligible students can apply for loans under these schemes regardless of their economic situation.

In 2008/09 academic year, there were around 136 000 full-time students pursuing publicly-funded or self-financing locally-accredited post-secondary programmes.  Around 54 000 students (40%) received financial assistance, including around 41 000 students (30%) receiving means-tested grants and loans and around 13 000 students (10%) receiving non-means-tested loans.  SFAA disbursed financial assistance totalling around $2.4 billion to these students, including around $1.8 billion of means-tested grants and loans and around $600 million of non-means-tested loans. 

Apart from these 13 000 full-time post-secondary students, there were another 10 000 students receiving non-means-tested loans to pursue part-time programmes and continuing education courses.  In 2008/09 academic year, SFAA disbursed around $995 million of non-means-tested loans to these 23 000 students.  The number of loan recipients and the amount of loans disbursed under each of the three non-means-tested loan schemes are shown below - 

• Scheme A - Non-means-tested Loan Scheme for Full-time Tertiary Students http://www.sfaa.gov.hk/eng/schemes/nls.htm  – for full-time tertiary students of publicly-funded programmes
  
• Scheme B - Non-means-tested Loan Scheme for Post-secondary Students http://www.sfaa.gov.hk/eng/schemes/nls3.htm  – for full-time students aged 25 or below of self-financing locally-accredited post-secondary programmes
  
• Scheme C - Extended Non-means-tested Loan Scheme http://www.sfaa.gov.hk/eng/schemes/nlss.htm  – for students pursuing a wide and diverse range of part-time programmes and continuing and professional education courses 

Objectives and scope of the review on non-means-tested loan schemes
The non-means-tested loan scheme was first introduced in 1998/99 academic year and has been in operation for more than 10 years.  In recent years, the number of students assisted and the amount of loans disbursed has been increasing.  At the same time, the interest rate and repayment arrangements, the increasing default rate and other operational problems such as the quality of eligible courses and alleged fraud cases of student loans have aroused wide public attention.  We consider it now opportune time to review the operation of the scheme. 

The Chief Executive announced in the 2009-10 Policy Agenda that the Government would conduct a review on the operation of the non-means-tested loan schemes, with a view to ensuring that:

• reasonable financial support is provided for students pursuing post-secondary and continuing education;
• effective measures are in place to reduce the loan default rate; and
• there is proper use of public resources.

The review would cover the scope, eligibility criteria, application procedures, interest rate, repayment arrangements, as well as measures to address the default situation. 

Issues of concern

• As the three non-means-tested loan schemes cover a diverse range of courses (especially Scheme B and Scheme C, and courses under Scheme C are not required to be locally-accredited), and there are no limits on the total number of courses for which loans may be applied and the total amount of loans that may be borrowed across academic years, the number of loan recipients and the amount of loans disbursed have been increasing.   In 2008/09 academic year, Scheme B and Scheme C accounted for about 75% loan borrowers and about 80% of loans disbursed.  The highest total amount of loans borrowed by a graduate of the same academic year under Scheme B was over $300,000, while that under Scheme C was over $500,000. 
  
• Many concern groups considered that the Government should review the interest mechanism (uniform interest rate across the three schemes, which includes a no-gain-no-loss rate and a 1.5% risk-adjusted factor) and repayment arrangements (loan repayment upon graduation and deferment of loan repayment arrangements) of the three non-means-tested loan schemes, with due regard to the affordability of loan borrowers.
  
• The default problem of the three non-means-tested loan schemes has become more serious – the default rate exceeded 15%.  Scheme C accounted for more than 70% of defaulters.  The age of default has been increasing (about 40% had defaulted for two years or more).  There is a tendency that defaulters would continue to default (about 80% of borrowers who had defaulted payment for 2-3 years as at end of 2006/07 academic year continued to default as at end of 2008/09 academic year).  The schemes had an overall shortfall of about $280 million, and cannot operate on a no-gain-no-loss basis.

For detailed information and statistics relating to the non-means-tested loan schemes, please click here http://www.gov.hk/en/residents/education/financialassistance/postsecondary/nlsreview.htm#2.

Key questions 
The Government would like to hear your views.  Specifically, we would like to have your views on the following key questions:

(i)    Should there be any restrictions on the loan amount, loan coverage (tuition fees, with or without academic expenses and living expenses) and number of courses for which loans may be applied under the loan schemes?

(ii)    Should there be any additional criteria on the type and number of courses eligible under the schemes, especially the Extended Non-means-tested Loan Scheme, which covers an extensive range of continuing education courses?

(iii)    Should we make any changes to the interest rate arrangements, such as whether there should be a standard risk-adjusted factor of 1.5% for all the three schemes?

(iv)    Should we make any changes to the repayment terms and conditions, including the repayment period and deferment arrangements?

(v)    Would you suggest any more effective measures to reduce the default rate apart from stepping up current administrative measures and legal recovery procedures, such as extra interest concessions for early loan settlement, or sharing credit data of defaulters with a credit reference agency in clearly defined circumstances?

Non-means-tested loan schemes
The non-means-tested loan scheme was first introduced in 1998/99 academic year to provide an alternative source of finance to those tertiary students who did not wish or failed to go through the means test as required under the financial assistance scheme concerned.  Its ambit has been expanded over the years.  At present, SFAA administers three non-means-tested loan schemes -

• Scheme A - Non-means-tested Loan Scheme for Full-time Tertiary Students http://www.sfaa.gov.hk/eng/schemes/nls.htm – for full-time tertiary students of publicly-funded programmes, i.e. students eligible for applying for means-tested assistance under Tertiary Student Finance Scheme – Publicly-funded Programmes http://www.sfaa.gov.hk/eng/schemes/tsfs.htm
• Scheme B - Non-means-tested Loan Scheme for Post-secondary Students http://www.sfaa.gov.hk/eng/schemes/nls3.htm – for full-time students aged 25 or below of self-financing locally-accredited post-secondary programmes, i.e. students eligible for applying for means-tested assistance under Financial Assistance Scheme for Post-secondary Students http://www.sfaa.gov.hk/eng/schemes/fasp.htm
• Scheme C - Extended Non-means-tested Loan Scheme http://www.sfaa.gov.hk/eng/schemes/nlss.htm – for students pursuing a wide and diverse range of part-time programmes and continuing and professional education courses

Terms and conditions of a non-means-tested loan

Interest rate
Borrowers of non-means-tested loans do not need to go through any means test, and the loans are not secured.  As such, to ensure the proper use of public funds, the non-means-tested loan schemes operate on a no-gain-no-loss and full cost-recovery basis to the Government, i.e. without any subsidy by taxpayers.

Interest is accrued once the loan is drawn down and throughout the study period. 

The interest rate comprises a no-gain-no-loss rate and a 1.5% risk-adjusted factor (RAF) that seeks to cover the Government’s risk in disbursing unsecured loans (risk of defaulted payment).  The current interest rate is 3.599%, which is far lower than that of unsecured loans in the market (ranging from around 7% to around 40% and the repayment period is normally 1 to 2 years). 

Repayment period
The borrower has to repay the loan in 40 equal quarterly instalments over 10 years upon graduation or cessation of studies or lapse of six years upon first disbursement of the loan where appropriate.  The first repayment instalment would normally be due after 6 months from graduation or termination of studies.

Loan amount and number of courses for which loans can be applied
Under Scheme A or Scheme B, an applicant may only apply for loans in respect of one eligible course in an academic year.

Under Scheme C, an applicant may apply for loans for more than one eligible course in an academic year.  For example, in 2008/09 academic year, around 9% of loan borrowers obtained two or more loans.  These included students pursuing programmes which were conducted on a credit or modular basis.  They are required to submit separate loan applications for each semester.  In addition, there were students obtaining more than one loan for pursuing more than one programme in the same academic year, with each borrowing loans totalling around $90,000.

Under Scheme C, there is no ceiling set for the loan amount obtainable in an academic year.  The total loan amount an applicant may obtain in an academic year is the total tuition fees of the eligible courses pursued and for which loans are applied for.  For example, in 2008/09 academic year, a person borrowed over $600,000 for studying an Executive Business Administration Master Programme.

Eligible courses under Scheme C are not required to be locally-accredited or reimbursable courses of the Continuing Education Fund.

An applicant may apply for loans under more than one loan scheme for pursuing different courses.  Each of the three non-means-tested loan schemes has no limits on (i) the total number of courses for which loans may be borrowed; and (ii) the total amount of loans obtainable across academic years.  For example, a person had borrowed over $300,000 in total to pursue eight different courses from diploma to degree levels over several academic years under Scheme C.

There is also no limit on the amount of loans that may be borrowed by a person under different loan schemes at any one time.

What if a borrower has difficulty repaying the loan?
If a borrower has difficulty in repaying on grounds of financial hardship, pursuing further full-time studies or serious illness, he or she may apply to SFAA for deferment of repayment.  In 2008/09 academic year, over 80% of deferment applications made under the three loan schemes were approved.

What if a borrower fails to repay the loan?
If a borrower fails to repay two or more consecutive instalments without making any deferment application, he or she would be considered to be a defaulter.

SFAA tackles default cases through sending reminders to the defaulters and their indemnifiers to urge them to repay the defaulted loans, and proactively negotiating with them so as to reach a new and mutually acceptable repayment schedule.  Apart from being costly and lengthy, the process is far from satisfactory mainly because:

• SFAA usually has difficulty contacting the defaulters and their indemnifiers due to un-notified changes of address/contact number; or
• the defaulters fail to provide sufficient supporting documents for review or request to extend the repayment period beyond the approved limit.

If SFAA receives no response from or cannot reach agreement on a new repayment schedule with the defaulter and his/her indemnifier, SFAA would refer the case to the Department of Justice for legal recovery action.

Key facts and statistics
You may be interested in knowing the following key facts:

(i)    Maximum loan amount receivable for 2009/10 academic year and age limit

(ii)    Total amount of loans disbursed and number of loan recipients for 2008/09 academic year

(iii)    Total loan amount of graduates of 2008/09 academic year  

The total loan amount of over 80% of graduates is below $90,000.  For Scheme A, a loan borrower had borrowed nearly $300,000 to pursue a 5-year Medicine Bachelor Degree programme.  For Scheme B, a loan borrower had borrowed over $300,000 to pursue a 4-year Accounting Bachelor Degree programme.  For Scheme C, a loan borrower had borrowed over $500,000 to pursue an Executive Business Administration Master programme.

(iv)    Median monthly repayment amount of graduates of 2008/09 academic year

For reference: the average monthly salary of graduates of 2007/08 academic year of full-time UGC-funded programmes was $15,750; and the average monthly salary of sub-degree graduates of 2007/08 academic year of full-time self-financing locally-accredited programmes was around $9,000.

(v)    Default Situation as at end of 2008/09 academic year
As at end of 2008/09 academic year, there were 13 177 defaulters amongst 85 000 repayment accounts with a total outstanding amount of $641million in the defaulting accounts.  The overall default rate was about 15.5%.  Over 70% of defaulters were loan borrowers of Scheme C. 

(vi)    Debt age analysis
The debt age of defaulted loans has been increasing.  Of the 13 177 defaulters under the three loan schemes as at the end of 2008/09 academic year, over 25% have defaulted for three years or more and about 40% have defaulted for two years or more.  These compared to 4% and 12% respectively in 2004/05 academic year. 

There is a tendency that those who have defaulted would continue to default.  Tracing the repayment history of those defaulters who have defaulted for six months to one year and two to three years as at the end of July 2007, 58% and 81% of them respectively were found to be still in default as at the end of July 2009.

(vii)    Interest received from RAF and defaulted loans
SFAA collected $290 million interest from RAF as at the end of 2009.  This fails to cover the defaulted loans plus undemanded principal in the defaulting accounts totalling $570 million as at the end of 2009. The shortfall is $280 million.

For more information on the non-means-tested loan schemes, you can refer to the following detailed statistics -