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

In both the U.S. and Kenya, the student loan programs have experienced high default rates. In the Kenyan case, since its inception in 1974, the loan program has been unable to recover the borrowed funds from the majority of the borrowers. The 1988 Report of the Presidential Working Party on Education Manpower for the Next Decade and Beyond established that by 1987, out of the more than Kenya Shillings (Ksh.) 300 million worth of student loans that had matured, about Ksh. 70 million could not from a legal point of view be recovered. By September, 1995, only Ksh. 200 million had been repaid out of Ksh. 5.8 billion owed to the government.40 With such a very low recovery rate (4%), it is no wonder the program is struggling and appears unlikely to survive unless it continues to receive heavy subsidies from the state. The Kenyan scheme has been faced by many administrative problems, the most significant of which is the inability of the staff to trace a number of recipients so they can begin repayment of their loans. The administration of the U.S. loan program has been strengthened by the fact that the system is computerized, making it much easier for staff members to contact loan recipients and encourage them to begin repayment.41 Despite computerization, the U.S. system also faces problems of non-repayment.

The Chronicle of Higher Education observes that the default rates for borrowers from public and private universities and from community colleges in the U.S. increased slightly in 1995.42 The U. S. Secretary of Education, Richard Riley, attributed this increased rise in default rates to: (1) the rise in default rates at traditional colleges; and (2) the marked increase in the availability of student loans after 1992 when Congress revised the Higher Education Act. The amendment to the Higher Education Act passed in 1992 increased annual borrowing limits and created an unsubsidized loan program for all students. Borrowing therefore became easier. Federal student loan volume has more than doubled since 1992 from $15 billion to about $34 billion in 1997.43 There was a reduction in loan defaults from 1990 to 1995 from $22.4 billion to $10.4 billion. But, given the fact that the loan programs emphasize `access and responsibility,' $10.4 billion (in default) is a lot of money and demonstrates the difficulty associated with loan recovery even in the United States. As a measure to reduce the loan default rates, several loan recipients have been taken to court, and in addition, the Internal Revenue Service (IRS)-the nation's federal tax collector-has also been able to identify some defaulters and withhold their tax refunds as a way of forcing them to meet their obligations to the loan program. A more efficient measure has been the effort by the U.S. Department of Education to bar more than 900 educational institutions from loan programs.

In Kenya, as an effort to improve loan recovery, the government now provides loans to students through commercial banks. The rationale behind this is that the banks would be in a better position to trace all loan recipients once they graduate and start working. All employers in the country have been mandated by the government to deduct loan premiums from their employees who are former loan recipients and remit the money directly to the Higher Education Loans Board. The government is imposing heavy penalties that include responsibility for paying the loans that employees may owe the student loan scheme, on employers that do not cooperate with this new method of collecting repayments on student loans. Unfortunately, the government has not beeen able to deal effectively with self-employed university graduates who are not willing to repay their loans.