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Modeling Aggregate Loans Recovery of the Student Loans Fund in Thailand

In: Income Contingent Loans

Author

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  • Kiatanantha Lounkaew

    (Dhurakij Pundit University
    The Australian National University)

Abstract

This chapter contributes to the student loan literature by providing empirical evidence of the trade-off between interest rate subsidies and expected aggregate loan recovery. In particular, the paper explores the potential impact of eliminating, or radically reducing, interest rate subsidies of the Thai Student Loans Fund (SLF), which takes a mortgage-type form. Three important policy implications can be drawn from the exercise. First, the consumption premium exercise stipulates that obligation to repay the loan should not involve more than 8 to 10 per cent of borrower’s income. Second, it has been found that an attempt to solve the high interest rate subsidies problem by setting the real rate of interest to 3 per cent is not a viable option because it is very expensive for taxpayers given the association with loan repayment obligations and default probabilities. The model predicts that, at this level of real interest rate, the expected loan recovery rate will be around 40 to 50 per cent. Third, the current design of the SLF does not facilitate consumption smoothing because it does not adequately take into account the variations in the labor market outcomes of Thai university graduates. It is argued herein that these deficiencies can be addressed by moving from a mortgage-type loan to an income contingent loan.

Suggested Citation

  • Kiatanantha Lounkaew, 2014. "Modeling Aggregate Loans Recovery of the Student Loans Fund in Thailand," International Economic Association Series, in: Bruce Chapman & Timothy Higgins & Joseph E. Stiglitz (ed.), Income Contingent Loans, chapter 8, pages 98-108, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-137-41320-8_9
    DOI: 10.1057/9781137413208_9
    as

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