Financing Higher Education in Indonesia: Assessing the Feasibility of an Income-Contingent Loan System

Elza Elmira, Daniel Suryadarma
Economic Policy, Education
Working Paper, December, 2018, Final



This paper examines the feasibility of an income-contingent loan (ICL) system to finance higher education in Indonesia. Using graduates’ income data from the 2015 National Labor Force Survey (Sakernas), we model the life-cycle income distribution of university graduates using unconditional quantile regression. We use these estimates to simulate different income-contingent loan schemes to observe the effect on the amount of repayment, length of repayment, government subsidy, and repayment burden of males and females in different quintiles of income. We utilize three loan schemes: without real interest, with 25% surcharge of the total loan, and with 2% real interest. Implicit government subsidy is lowest with the 25% surcharge scheme. Therefore, increasing the repayment burden by 2 percentage points to 10%, still within the range of acceptable burden, could reduce repayment duration by 3–4 years and reduce government’s implicit subsidy. Result shows that ICL with lower repayment burden is feasible in Indonesia and can increase access to higher education. However, the scheme requires a certain level of capacity among tax authorities, as the repayment needs to be administered through the tax system. The government also needs to develop strategies to reach graduates who choose to work in the informal sector.

Keywords: income-contingent loan, ICL, student loan, repayment burden, higher education financing, Indonesia

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