A comparison of the efficiency and equity implications of university loan programs in the United States and in Kenya

Journal of Third World Studies, Fall 2001 by Nafukho, Fredrick Muyia, Verma, Satish

INTRODUCTION

As the countries of the world become increasingly interdependent, there is growing awareness among policy makers that governments in both developed and developing countries face common questions of social policy. The financing of education is no exception.1 The major issues faced by governments with regard to financing of higher education include: who should attend college; who should pay the cost of higher education; and what the appropriate contribution of the family, the student and the public should be in the financing of education. In other words, to what extent should taxpayers subsidize higher education? How can higher education opportunities be equalized for lowincome and other disadvantaged groups in society?2 Although it is not possible or even appropriate to transfer directly models from the higher education system of one country to another, cross-national comparisons can enlighten and inform policy analysis. In this paper, the operation of student loan schemes in the United States is compared to that of similar programs in Kenya. In the discussion that follows, emphasis will be placed on determining the efficiency and equity implications of student loan schemes in these two countries.

THE IMPORTANCE OF STUDENT FINANCIAL AID

All over the world, governments are committed to assisting their citizens receive an education. This can be explained mainly by the fact that governments have faith in education as an investment. It has been observed that the escalating college costs all over the world have led to direct pressure for students to seek financial aid.3 This financial assistance provided to students in institutions of higher education is important since students from all societal groups are able to realize their potential and improve the quality of their lives. For example, students from low-income group would be denied an opportunity to attend college without some form of financial assistance.

Education can and must make a positive difference in the development of any society and in the quality of life of its citizens. As noted "only through unwavering commitment of student aid dollars for higher education can we ensure that futures of students are not limited by stereotyping, segregation or discrimination."4 To illustrate the importance of student financial aid using the U.S. example, it is noted that well over half of all students in higher education today rely on one or more forms of financial aid during their academic careers.5

Student financial aid is one area of critical concern and urgent importance to parents, policy makers and to institutions of higher education all over the world. Student aid is a very important means of achieving enrollment goals and ensuring diversity in the composition of the student body. It also helps to address societal concerns such as the need for an educated populace, the advancement of knowledge and technology in society and equal educational opportunity.

The purposes for which financial aid is provided by state agencies to students in the United States of America has been listed in a chronological manner as follows:

* recognition of academic achievement and potential;

* assistance to the physically handicapped for vocational training;

* manpower needs-that is to recruit future teachers and nurses;

* veteran's benefits;

* inclusion of financial need along with academic ability;

* emphasis on financial need, rather than ability as a main criteria;

* elimination of categorical programs with specific targeted recipients subsumed in large comprehensive programs;

* provision for use of scholarship and grant awards at private colleges and universities; and

* appropriation of federal student programs.6

When we examine the reasons why state agencies provided financial assistance to students as early as 1975, we notice that these reasons are still valid even today. These determinants of aid flows to students could provide a useful guide to several countries, especially in the Third World. Financial aid can help students from poor families develop the skills to become productive citizens and participate more efficiently in national development. In developing countries, where most people are unable to participate fully and gainfully in increasingly technologically oriented economies because of the lack of skills, education is a very important determinant of human progress. Unfortunately, many of these people cannot afford to finance their own education and training. Thus, the need for financial assistance.

STUDENT LOANS AS A FORM OF FINANCIAL ASSISTANCE

All over the world, students frequently borrow money to finance their education. As pointed out, "students in many countries have always borrowed from family or relatives to finance either the costs of tuition or their living expenses, and many other students borrow from banks, their governments or other financial institutions."7 In the past twenty years, many countries, both developed and developing, have established programs that grant loans to students for educational purposes. The spread of the notion of education as an investment in human capital and the belief that education contributes to economic growth have encouraged many countries to improve student access to capital markets.8 For many years, the literature on student loans for education was very limited.9 As a consequence, the World Bank commissioned several studies that were designed to provide the multilateral agency with a clearer view of the importance of student loans to the accumulation of human capital, especially in developing countries. In these studies, some researchers argued that the idea of student loans came from the desire by many societies to force students to take financial responsibility for part of the cost of their education. This came to be known as the paradigm of cost sharing and burden shifting.10 This paradigm asserts that the costs of higher education in any country are shared by four parties: taxpayers, parents, students, and philanthropists. It has been established that higher education, especially in developing countries, has higher pecuniary returns to the student.11 Therefore, loans were introduced in several countries of the world to ensure that the main beneficiaries of higher education, the student and his family, help in its financing. Empirical evidence shows that all over the world, economists and educationists have come to a consensus that loans are essential in: