Our Young Need New Ways of Financing Their Higher Education


Any system for raising human resource skills must not only care about the present generation but be sustainable over generations. A rethinking in that direction is sorely needed.

Higher education in Malaysia has evolved together with the economy. In the 1980s large-scale industrialisation saw agriculture and mining giving way to manufacturing and services as the main drivers of GDP growth.

Consequently, rapid sustained growth into the 1990s pushed the country to accelerate the production of human resources in order to meet the expanding needs of the market. Thus, from only five universities before the 1980s – Universiti Malaya, Universiti Sains Malaysia, University Kebangsaan Malaysia, Universiti Putra Malaysia and Universiti Teknologi Malaysia – the number was more than doubled by the next decade. Today, there are 20 public universities in the country.

In addition to establishing more public universities, the government also set up vocational university colleges in suburban areas around the country, along with dozens of new polytechnics. Bachelor’s degree courses were also reduced from four years to three years in a bid to produce graduates in a shorter time.

Recognising the need to diversify choice and to meet burgeoning demand for higher education without overstretching public coffers, the government began to encourage the growth of private higher education through the introduction of the Private Higher Educational Institutions Act 1996.

By 2002, 15 private universities were established by either government-linked companies or political parties linked to the ruling regime. Since then, other private colleges have been upgraded to university status, bringing the total number of private universities to 23 today, excluding seven foreign university campuses.

Besides this, hundreds of private colleges and university colleges were also set up. In fact, private higher education enrolment has increased so drastically that the recently published Malaysia Education Blueprint 2015- 2015 (Higher Education) predicts that private higher education enrolment will overtake public ones by 2025.

Without a doubt, a key factor that drove the growth of higher education enrolment, both in public and especially private institutions, is the establishment of the National Higher Education Fund Corporation (PTPTN) in 1997. With student loans made available to the general public, higher education became instantly accessible to many school-leavers who would hitherto have not been able to afford it. Accordingly, university enrolment grew exponentially from around 60,000 a year in the early 1990s to more than half a million now.

However, despite its successes, the PTPTN has been plagued by two major problems: loan repayment rates have been abysmally low, while the ease of access to PTPTN loans and the lack of quality control have led to the proliferation of higher education institutions that simply fail to provide students with the necessary education and skills required by the market.

Low Repayment Rates

As of September 30, 2015, RM6.71bil or 45.8% of PTPTN loans have been repaid, out of a total of RM14.65bil that should be settled. Of 1,792,919 borrowers, only 1,185,077 have made repayments, which means that 607,842 borrowers have not. As it stands, the total outstanding amount is worth RM4.97bil.

The low rate of repayment for PTPTN loans is not really surprising, for a number of reasons. Firstly, there is an undeniable problem of attitude towards government loans. Unfortunately, many borrowers treat money from the government as if it were an entitlement rather than a privilege extended to them. Clearly, it is inconceivable for borrowers to treat commercial loans in the same lackadaisical manner. If they did, Malaysia’s entire financial sector would crash overnight.

University enrolment grew exponentially from around 60,000 a year in the early 1990s to more than half a million now.

Secondly, the fact of the matter is that there are just many graduates who are simply unable to afford the repayments. The liberalisation of the higher education sector in the 1990s coincided with the economic “Asian Tiger” heydays when Malaysia was notching growth figures that were north of seven per cent per annum. However, the same numbers have not been seen since the 1997 Asian Economic Crisis, and the reduced performance of the economy has directly impacted the labour market.

Today, Malaysia faces the worrying problem of youth unemployment and underemployment. Last May, minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar revealed that out of 400,000 unemployed in the country at the time, 161,000 of them were graduates1.

Meanwhile, one out of every five Malaysian graduate toils away in underemployment, working in jobs that do not commensurate with their qualifications. In such circumstances, it is unsurprising that many graduates fail to make their PTPTN loan repayments.

Recognising some of these weaknesses, the government has taken steps to increase the PTPTN loan repayment rate, including diversifying repayment channels, issuing reminder notices, taking legal action against defaulters, instituting compulsory salary cuts on government servants, blocking defaulters from leaving the country and blacklisting them on the Central Credit Reference Information System (CCRIS).

While these measures have brought slight improvements to the situation, they are merely salves that do not resolve the underlying problems, namely the inflexibility of the loan repayment scheme and the inability of borrowers to repay. Therefore, more comprehensive reforms are required to address the issue.

An empty exam hall. By 2002, 15 private universities were established. Since then, other private colleges have been upgraded to university status, bringing the total number of private universities to 23 today, excluding seven foreign university campuses.

A More Flexible Loan Repayment Scheme

At the moment, PTPTN uses mortgagetype loan structures, in which the interest rate, loan repayment period and monthly repayment rate are fixed. Such an arrangement actually creates a burden for borrowers, especially fresh graduates. For example, it is not uncommon for graduates to earn little more than RM2,000 a month in their first job. This being the case, even a monthly commitment of RM200 a month would represent about 10% of their income. How would graduates survive after taking into consideration other obligatory payments such as EPF, rental, telephone bills and vehicular loans? As alluded to earlier, the failure of many graduates to repay their PTPTN loans may have less to do with irresponsibility than with the fact that they simply cannot afford it.

A more flexible loan repayment scheme should be used instead, such as an incomecontingent repayment scheme, whereby the rate of repayment would scale with the income of borrowers. In other words, the higher the salary of a graduate, the higher the quantum of repayment, and vice versa.

Not only would this effectively reduce the loan repayment burden of a graduate, it would also reduce the repayment period. This is a far more progressive system that would be more responsive to each individual graduate’s career progression.

At the same time, a minimum income threshold should also be introduced. In Australia, for example, borrowers of government study loans are only required to repay their loans once their income surpasses AU$54,126 a year. This is to avoid unnecessarily burdening a low-income graduate. In Malaysia, the minimum income threshold could be set at, say, RM3,500 a month (RM42,000 a year), thus ensuring sufficient breathing room for graduates before they have to start repaying their loans. Of course, any quantum should only be decided after a proper study is conducted.

Lastly, PTPTN should be directly linked to the EPF and tax systems to ensure that repayment rates can be pegged to income. This way, compulsory deduction from source as a method of repayment can also be introduced as a far more efficient means of loan repayment collection.

The Proliferation of Low Quality Higher Education Institutions

The ease of access and somewhat loose conditions of PTPTN loans have resulted in many students receiving financial assistance. Sensing the opportunity, it comes as no surprise when this has also resulted in a proliferation of higher education institutions, especially private ones, of questionable repute. Many of these colleges were established simply to profit from the easy availability of PTPTN loans, rather than to impart knowledge and skills.

In fact, it is a race to the bottom as these subpar colleges compete with each other to grab as many students as they can by lowering their qualification criteria to the absolute bare minimum – pass SPM with one credit or its equivalent for certificate courses, and pass SPM with three credits or its equivalent for diploma courses. If education was a barrel, this would be akin to scraping its bottom.

Such a situation has not only produced uncompetitive graduates, but also an oversupply in the market. According to a World Bank report2, there is now a wide gap between supply and demand in the labour market as universities and colleges are churning out graduates who are either under-skilled or qualified in the wrong fields. This mismatch between supply and demand has thus contributed to increasing graduate unemployment figures. According to the Ministry of Higher Education’s own statistics, 27% of private higher education graduates and 24% of public higher education graduates fail to get jobs six months after graduating. According to Wahid Omar, about 8.8% of youths aged 20 to 24 are unemployed3.

Clearly, the current system has not only failed to fulfil the economic needs of the country, it has also created a vicious cycle of low-quality education and subsequently, low-income graduates who cannot afford to repay their study loans. A new paradigm is sorely needed.

A Public-Private Partnership in Education Financing

PTPTN loans currently depend on the public purse for funding, which means that the failure to collect loan repayments would inexorably result in a financial liability for the government. Thus, it may be more prudent to shift the burden of providing education loans to the private sector, such as banks or other financial institutions, primarily because they have proven to be far more efficient and effective at collecting loan repayments. After all, the penalties for defaulting on a bank loan are taken far more seriously.

However, this does not mean that the government should escape responsibility. The burden of financing higher education entirely through the private loans market may prove to be too much of a burden for students and their families. Ideally, the shift towards private sector financing should also come hand-in-hand with government assistance.

Thus, it is proposed that a demand-side voucher system be considered, in which every SPM graduate would receive a subsidy from the government in the form of a “voucher.” This voucher should be meanstested by tying it to the household income of the student. For further incentive, the formula for calculating the voucher amount should also take into account the academic results of the student.

For example, an SPM graduate from a low income family who has achieved excellent results may receive a voucher worth RM20,000. On the flipside, a student from a higher income family with average results may, for example, be subsidised by RM10,000 instead. These figures are used for illustration – a proper formula can only be devised after careful consideration of many factors.

These vouchers would act as tuition fee subsidies, which can be used at any accredited higher education institution of a student’s choice, provided they win admission into them. To be sure, these vouchers would not be able to subsidise their entire cost of education, nor are they designed to. This is where loans from the private sector would be able to complement the voucher system.

In addition to subsidising higher education through the voucher system, the government should also support the student loans by providing guarantees. This would enable banks to offer competitive interest rates and at the same time turn these loans into highly rated financial assets. This would in turn open up possibilities for asset securitisation in the future, if such an option should be considered down the road.

Additionally, the shifting of education financing to the private sector would also have the important effect of curbing the proliferation of low-quality higher education institutions, by virtue of market corrections. Just as banks would not extend loans for businesses deemed to be unsustainable or unprofitable, neither would they offer study loans to students intent on enrolling in a college of questionable repute, as the probability of the students attaining a decent job after graduating and then repaying their loans would be low. In other words, market mechanisms would force higher education institutions to increase their quality and competitiveness, while driving out underperforming ones.


Education is as much a private concern as it is a public one. Thus, having recognised the weaknesses of the existing higher education financing system, viz. the inflexibility of the PTPTN loan scheme and correspondingly its low rate of repayment, as well as the larger policy issues with regards to PTPTN that have led to the generally poor quality of graduates and the loopholes that have facilitated the growth of many profitoriented “degree mills”, it is clear that fundamental reforms are needed.

As the government cannot absorb the burden of financing higher education in its entirety, the solution towards addressing the weaknesses of the current system and ensuring its long-term sustainability requires a comprehensive public-private partnership.

By introducing market funding in the form of private sector loans, tempered by government subsidies through a demandside voucher system, implemented in concert with more dynamic regulations such as income-contingent repayment schemes and a minimum income threshold for repayment, student financing can be reformed to ensure that higher education becomes more accessible, more sustainable, better in quality and less of a burden for young Malaysians.

1 www.themalaysianinsider.com/malaysia/article/ graduates-among-400000-currently-unemployedin- malaysia-says-minister
2 http://documents.worldbank.org/curated/ en/2007/03/8420628/malaysia-knowledgeeconomy- building-world-class-higher-educationsystem 
3 www.themalaysianinsider.com/malaysia/article/ financial-woes-of-private-varsities-could-affect-upto- 120000-students-says

Zairil Khir Johari is MP for Bukit Bendera, Penang, and executive director of Penang Institute.

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