Borrowers obviously will celebrate if they see a reduction in their repayment obligation. When the National Higher Education Fund Corporation (PTPTN) reduces its service charge or really, interest rate, from 3% to 1%, already I read borrowers singing high praises to the body. The reduction of rate also turns the financing facility into a subsidy, small as it may be.
Even with the traditional inflation rate between 3% and 4% that Malaysia had enjoyed earlier, 1% interest rate has the PTPTN suffering negative returns. The borrowers meanwhile get to pay less in real terms. Accommodating inter-temporal consideration which is typical in calculation present values, clearly the borrowers are being subsidized.
Now, while I am vehemently anti-subsidy as I have consistently demonstrated in past postings, my opposition towards subsidy is based desire to eliminate certain kind of negative externality as well as a desire for freer market. When it comes to positive externality however, I can be quite supportive. The public benefit derived from well-educated citizens are far higher than any private benefit enjoyed by individual borrowers, assuming all else is constant.
Indeed, subsidization of education creates positive externality. As a result, I am willing to have a subsidy supporting students. This willingness of course has it own qualifications but I shall leave that topic for another day.
One potential issue with the lowering of the interest rate is the disincentive to pay the installments on time. Compared to previously, the penalty of not paying any installment is smaller now. This may encourage borrowers to delay their payments, preferring to incur minor penalty to manage their own cash flow. As a result, PTPTN may have trouble managing its cash flow.
Finally, the across the board cut seems too blunt. I prefer to turn the PTPTN into a convertible loan, rewarding the best students with subsidy, or if you like, scholarship. For those whom are less successful, let them take the full brunt. Under this scenario, I think we would introduce a strong incentive for students to succeed.