Higher Education Loan Schemes Across the Globe: A Systematic Review on the Utility Derived and Burden Associated with Educational Debt

Abstract

Education is considered an investment in human capital that is gained at the cost of knowledge acquisition. This cost is borne by the beneficiary along with subsidy provided by the government, if any, that is mainly collected through tax revenues. This article aims to systematically review the utility derived and the burden experienced with educational debt borrowers across the globe as per the three types of educational loan schemes present across the globe. This study follows the PRISMA guidelines for review selection, and 47 articles published between 1994 and 2024 were included for the final review. The study results reveal that education improves the quality of life; an educational debt servicing to income ratio above 8% is considered as a financial burden. Also, the results reveal that material benefits are high after education along with an increase in the psychological burden because of repayment concerns. This study highlights the need to move towards designing a flexible repayment system in the education loan scheme based on the income contingent schemes adopted in many countries. Income contingent schemes reduce the repayment burden of the borrowers but the return to the lender is limited to the income of the borrower, and mortgage-based schemes are associated with high repayment burden. Therefore, a dynamic scheme will fix the problems associated with the repayment burden by creating a dynamic link between the benefits received and the contributions made by the borrower.

1. Introduction

Higher education denotes any tertiary education that is imparted after 12 years of schooling. Gross Enrolment Ratio (GER) in the Indian higher education system is at 28.4% (Murthy 2022), whereas the global enrolment in higher education ranges from 75% in America and Europe, to 8% in Africa (Nerkar and Dhongde 2018). Higher education as a commodity is treated as a public good, social good, merit good, and private good by several authors. Higher education is also treated as a positional good by a few authors since their argument is that institutes compete among themselves to obtain the best students, and students compete among themselves to be admitted to the best colleges (Marginson 2004). Also, institutes compete for efficiency and quality (Marginson 2004).

Education is a significant investment in human capital, which is gained with the cost of knowledge acquisition. Moreover, education creates positive externalities in society as per several economists. A few of the explicit positive externalities are an increase in the economic activity and living standards of the people, an increase in the tax base and volume of the government, and a reduction in crime rates, which ultimately reduces the public expenditure along with an increase in the revenue for the government. Even though several schools of thought have favored the treatment of higher education as a public good, few schools of thought have challenged the treatment of higher education as a public good. In addition, the proportion of resource sharing between private financing and public funding for higher education remains ambiguous.

Education loans across the globe are subsidized in one way or the other since education is considered as human right and a public good by many authors (Hazelkorn and Gibson 2019; Marginson 2011). Authors have also argued that knowledge gained through education is a non-rivalrous commodity and the society with higher levels of education is economically efficient that creates large positive externalities. Whereas the opponents have argued that someone must bear the cost for the resources of higher education required for acquiring or creating new knowledge and let the beneficiaries who are educated pay the cost (Williams 2016). Nevertheless, by treating education as a public or private good, there has always been a provision of “hidden grants” for funding education in various ways throughout the world that includes a combination of either interest charged for an education loan below market rate, no interest charged, subsidy provided on interest charged during moratorium, holiday period provided for the entire study duration including grace periods after completion of the course, long amortization periods, or inflation delinked repayments (Ziderman 2004). Also, the study by Woodhall (1992) on the feasibility of education loans as an alternative resource provided by the International Institute for Educational Planning (IIEP) and the World Bank, found that education loans can help to generate additional resources for financing higher education especially in developing nations.

This review directs future researchers to formulate the hypotheses using the gaps identified, avoids duplicate exertions in the field of education loan schemes, and identifies the present state and progress of the various education loan schemes present across the globe with an emphasis on the utility derived and burden experienced. This review benefits the scholars and policy makers with an updated understanding of the problems associated with the current schemes by reviewing the various schemes across the globe. The main objective of this study is to review the different types of education loan schemes present across the globe with respect to the utility derived and the burden associated with educational debt since there are limited studies that evaluate the education loan schemes, and past studies have limitations that do not address the matters with a cost–benefit analysis.

2. Literature Review

Education loan schemes are available in around seventy-five countries in the world (Shen and Ziderman 2009), and can be classified into two different types based on repayments. Mortgage-based and income-based loans are the two broad types. Mortgage type loans are utilized in countries like China, Japan, and India. In such types of loans, the loan repayment conditions are fixed at the time of applying for the loan and the borrower must repay a fixed amount of money for a specific period called equated monthly installments, and based on the interest rate fluctuations, the amortization period may vary, but more or less the repayment amount will remain almost constant and it is not decided based on the income of the borrower. The income contingent loan (ICL) scheme was introduced for the first time in the year 1989 in Australia (Chapman 2014), followed by many countries like New Zealand, Hungary, and United Kingdom, among many other countries. The ICL has been highly successful in Australia, New Zealand, Scotland, Sweden and South Africa. In this type, the repayment is contingent on the borrower’s income, and it is usually progressive with increasing income until a given time period or until a certain amount is recovered, and if the borrower’s income is below a certain threshold level, then the borrower is exempted from loan repayment until the income crosses the level of threshold (Chapman 2014). The repayment is collected in the form of taxes, and hence it is considered the most effective repayment collection mechanism.

A subvariant of income contingent type, called a fixed schedule income contingent loan, is present in countries like Norway, South Korea, and the Unites States of America (Johnstone 2009). In this type, if the borrower is unemployed or earning low income, then only the minimum repayment is to be made as per the income contingency plan, and the amount exceeding the threshold can be deferred. When the borrower is employed and earns sufficiently well, a regular fixed schedule of repayment can be resumed with the payments of previously deferred repayments included, if any.

In developing and underdeveloped nations, education loans by private players are an efficient cost sharing mechanism between the government, bank, and households. Education loans by banks reduce the financial strain on the government and households (Duraisamy and Duraisamy 2016). Hence, education loans are a product needed for the efficient functioning of the labor market. In addition, reduction in education loan defaults makes the product self-sustainable and helps to achieve the sustainable development goals of quality education (SDG 4) by making higher education affordable for all and providing decent work and economic growth (SDG 8) by developing the human capital of the economy. Increasing the level of education decreases poverty levels as per the study by Fonseca et al. (2024), and poverty alleviation can be achieved by financial inclusion with access to credit (Mwirigi et al. 2024). Also, to fulfill the stringent and increased regulatory criteria of capital requirements globally, banks should either increase their equity or their interest spread (Golbabaei Pasandi et al. 2024) and reduce the loan defaults. A study on the difficulties that graduates faced in education loan repayment post the COVID-19 pandemic revealed underpaid jobs, cost of living, and income as the significant factors affecting repayment (Jamil et al. 2022). The study also suggested the need to delay gratification among young adults and learn financial management strategies to mitigate the burden associated with repayment.

Education loans are not charged any interest in a few countries like Germany, Japan, New Zealand, Malaysia, Egypt, and Ethiopia (Shen and Ziderman 2009). In the same study, it is reported that the repayment ratio is highest in the Czech Republic at 108% and lowest in countries like Nigeria at 11% and Egypt and Russia at 12%. In India, the repayment ratio is around 80%. A low repayment ratio indicates huge government support through hidden grants and a high repayment ratio above 100% discourages borrowing and indicates the treatment of education loan as a commercial product (private good or positional good). The “hidden grants” include various provisions like a below market interest rate for education loans or no interest charged, subsidy provided on interest charged, long amortization periods, and repayments that are not linked to inflation (Ziderman 2004). Also, the recovery ratio should be high for the economic feasibility of the education loan scheme; it was highest in the USA at 79% and Japan at 78% and lowest in the Philippines at 2% and Kenya at 6% (Shen and Ziderman 2009).

This systematic review aims to evaluate the existing education loan schemes across the globe in terms of utility derived and burden experienced (cost–benefit analysis), challenges faced by the current schemes, and the measures to overcome these challenges. Hence, the research questions are framed as follows:

RQ1. What is the publication trend and who are the most influential authors evaluating education loan schemes?

RQ2. What is the utility derived by education loan borrowings?

RQ3. What is the burden experienced by education loan borrowers?

RQ4. What are the major themes that emerge in education loan scheme analysis?

RQ5. What is the future scope of research in education loan scheme design across the globe?

3. Materials and Methods

This study systematically reviews the articles on higher education loan schemes based on the methodology of evidence-based management knowledge for systematic reviews (Tranfield et al. 2003). Screening and eligibility criteria include the Participants, Interventions, Comparisons, and Outcomes (PICO) evaluation method. The Preferred Reporting Items for Systematic Reviews and Meta-Analysis (PRISMA) guidelines mentioned by Moher et al. (2009) were applied for the inclusion and exclusion criteria. Biblioshiny package in R Studio was used to conduct the bibliometric analysis, review the trends, and discover directions for future research. Biblioshiny is a package in R programming language to visualize the data that was developed by Aria and Cuccurullo (2017) to discover meaningful insights from the data. The search was performed in the Scopus database since the articles covered are larger in number when compared to web of science or any other databases (Mongeon and Paul-Hus 2016).

The TCCM (Theory, Context, Characteristics, and Methodology) framework developed by Paul and Rosado-Serrano (2019) was also applied in this study. The theory of planned behavior and human capital theory were the most commonly applied theories in the context of cost–benefit analysis characterized by social influence with comparative analysis techniques. Quantitative and qualitative methods were systematically reviewed as per the standards prescribed in the systematic hybrid literature review by Bhukya and Paul (2023). The ADO (Antecedents, Decisions, and Outcomes) framework developed by Paul and Benito (2018) was used to organize the research findings in a well-structured manner. Antecedents are the key drivers for the informed decisions taken and outcomes are the consequences for the decisions taken.

The search word combinations with Boolean operators used are TITLE-ABSTRACT-KEYWORD (“education loan” OR “student loan” OR “education debt” OR “student debt” AND “scheme” OR “program” OR “policy” OR “finance” AND “burden” OR “utility” OR “cost” OR “benefit”) AND PUBLICATION YEAR > 1993 AND PUBLICATION YEAR < 2025 AND (LIMIT-TO (DOCUMENT TYPE, “article”) OR LIMIT-TO (DOCUMENT TYPE, “book chapter”) OR LIMIT-TO (DOCUMENT TYPE, “review article”) OR LIMIT-TO (DOCUMENT TYPE, “conference paper”) OR LIMIT-TO (DOCUMENT TYPE, “book”)) AND (LIMIT-TO (LANGUAGE, “english”)). After this search and initial screening process, 439 articles were extracted from the Scopus database in comma separated values format for the bibliometeric analysis. Articles, books, reviews, and conference papers were included after excluding editorials, notes, and short surveys, as shown in Figure 1. There were 47 records included for the detailed analysis.

4. Results

The study applies bibliometric analysis to analyze the various types of higher education loan schemes present across the globe. The toolkit for bibliometric result analysis by Donthu et al. (2021) prescribes science mapping and performance analysis for bibliometric analysis. The science mapping method was performed using keyword co-occurrence analysis in this study and the performance analysis method used in this study was based on citation and descriptive analysis. In addition, the theoretical contributions described from science mapping and practical contributions from performance analysis were based on the study conducted by Mukherjee et al. (2022). The study results are discussed in the below sections.

4.1. Annual Scientific Production

Figure 2 shows the publication trend from 1994 to 2024. The figure depicts rapid growth in publication since 2012 and the compounded annual growth rate was at 9.03% (from 1995 to 2023). From 1994 to 2012, slow-paced growth in the research field was observed as per the chart diagram. After 2012, a surge in publications was observed, demonstrating a growing interest in the field of education loan schemes by the scholars. There were 439 articles published from 1994 to 2024, and 79.49% of the articles were published between 2012 and 2024. The year 2023 recorded the highest number of publications (n = 45). The statistics of annual scientific production show that the study of education loan schemes with cost–benefit analysis has emerged as a research theme of interest in recent years.

4.2. Authors’ Relevance and Impacts

Figure 3 displays the relevant authors in the field. Chapman has published seven articles related to the field of education loan schemes. The second highest publication was carried out by Smole, with six articles.

Table 1. Authors’ impacts.

Ranking by Citations
Rank	Author	h-Index	Citation(s)	Rank	Author	h-Index	Citation(s)
1	B Chapman	7	112	11	Kg Poole	3	19
2	T Clark	3	31	12	Cj Scheckel	3	19
3	L Dearden	3	35	13	N Barr	2	62
4	T Friedline	3	81	14	R Charron	2	134
5	Ms Gonzalez	3	23	15	W Clarke	2	136
6	M Grinstein	3	70	16	S Dudley	2	29
7	R Hordosy	3	31	17	W Elliott	2	36
8	Db Johnstone	3	23	18	Lm Greenhill	2	9
9	Jm Lee	3	25	19	T Higgins	2	38
10	Jr Newman	3	19	20	Mp Ison	2	5

Source: authors.

shows the 20 most relevant authors in terms of author impact and the total citations received. Clarke’s work was cited 136 times and Chapman has the highest h-index of 7.

4.3. Co-Occurrence Network

The co-occurrence network as shown in Figure 4 was classified under three types of clusters, as described below.

• Cluster 1: Types of education loan schemes implemented across nations

The types of education loan scheme across nations were highlighted in the network, indicating the need to study different methods of recovery and subsidies provided. Also, comparative studies were performed on the schemes and most of the studies were from the U.S. with a special focus on medical and dental education with service repayment plans. Many articles in the education loan policy analysis were found in the U.S., Canada, and New Zealand as per the network diagram.

• Cluster 2: Challenges associated with existing education loan programs

The second cluster was identified based on the challenges associated with the existing loan programs based on the identified keywords of income, lending behavior, finance, salary and fringe benefits, internship and residency, organization and management, investment, medical and dental education, major clinical study, and so on. The cluster was grouped under challenges to analyze the records further in the discussion section.

• Cluster 3: Factors affecting education loan repayment

The third cluster was identified based on repayment concerns. This cluster had keywords related to economics of education, lending behavior, salary and fringe benefits, scholarships and grants, financial management, career, employment, and investment.

4.4. Thematic Map

The thematic map analysis procedure mentioned by Cobo et al. (2011) was applied in this study. The trending topics in education loan schemes were identified based on the central-density diagram as shown in Figure 5. The four quadrants as per the clusters of the keywords based on centrality along the X-axis and density along Y-axis are discussed below.

Motor Themes: Decision making based on cost–benefit analysis, stream of study, medicine, pharmacy, public good, and private good were found as motor themes.

Niche: Cost analysis, financial provision, human capital, financial institution, and bachelor’s degree.

Peripheral: Teaching, income distribution, household income, laws, and legislation were classified as emerging or declining themes.

Basic Themes: Subsidy system and aid, tax system, and higher education were classified under basic themes.

Central Themes: Lending behavior, credit provision, financial services, government approach, and public spending were identified as central themes.

5. Discussions and Implications

Key implications are discussed below with the identified clusters and themes based on the co-occurrence network and thematic analysis using the ADO framework.

5.1. Cluster Analysis

5.1.1. Cluster 1: Types of Education Loan Schemes Implemented Across Nations

The income contingent loan (ICL) scheme was introduced for the first time in the year 1989 in Australia, followed by many countries like New Zealand, Hungary, United Kingdom, Scotland, Sweden, and South Africa (Chapman 2014). Countries that cover all students enrolling in higher education with an inclusive policy by adopting universal income contingent loans include New Zealand from 1991, United Kingdom from 1998, and Hungary from 2001. Several studies found that income contingent loans have a significant relationship with the financial well-being of the borrower measured by the borrower’s income. Whereas mortgage type loans have a significant relationship with the country’s economic conditions like interest rates and inflation.

Mortgage type loans are followed in countries like China, Japan, and India and a few studies found that mortgage type loans are usually associated with high initial repayment burdens (Chapman and Liu 2013; Usher 2005). Hence, many other countries have partially adopted the income driven loans: the U.S. from 1994, Thailand from 2006, Korea from 2009, Brazil from 2016, Netherlands from 2016, Japan from 2017, Canada from 2017, and Colombia from 2023 (Chapman 2022). A subvariant of income contingent type, called a fixed schedule income contingent loan, is present in countries like Norway, South Korea, and the Unites States of America (Johnstone 2009).

5.1.2. Cluster 2: Challenges Associated with Existing Education Loan Programs

The absence of a policy on education loan recovery, the loan collection procedure, government integrity compliance, and penalty waiver were found to significantly affect the recovery of the education loan amount in Kenya (Warue and Ngali 2016). Economic challenges of a nation and unemployment remain a concern in Ghana (Atuahene 2008). Also, the unemployment rate in Sub-Saharan African countries and countries with low human development has an inverse relationship with higher education enrolment (Njifen 2024). A few additional challenges include identifying the students in need of financial aid, tracking and tracing the defaulters, and repayment of students who are employed abroad (Atuahene 2008).

A study on education loan repayment burden by borrowers in Vietnam highlights the need for an alternative student loan financing system that currently follows a mortgage type educational loan repayment scheme (Chapman 2006; Chapman and Liu 2013). The current scheme of education loan funding in Thailand mainly relies on the integrity of the students for repayment, and the scheme based on income contingency can be an alternative way of financing education to reduce loan defaults, since the repayment relies on the income and is collected in the form of taxes (Savatsomboon 2004). Also, themes of positive and negative attitude of students toward education loan repayment were identified by Bhandary et al. (2023a) as influencers of repayment behavior.

Income driven educational loan repayments in Australia has been perceived differently by citizens, graduates, students, taxpayers, and the government based on the fairness of the income contingency program. Citizens evaluate the fairness of the policy in comparison with their peers and when citizens perceive any policy as unfair there might be defiance and non-compliance. Government evaluates fairness based on the benefits to the society at large. Hence, reconciliation requires dialog and cooperation among stakeholders to achieve consensus on the policies (Braithwaite et al. 2022). Also, the income contingent loan scheme in Australia that was widely appreciated worldwide once upon a time needs to be reviewed in the context of rising outstanding educational debt levels and the increasing female student population. The female population worldwide is considered with care responsibilities towards their family unlike males, and they are known to prioritize the upbringing of their family over career choices, resulting in career breaks and part-time earnings instead of full-time, which ultimately reduces their lifetime earnings. The crux of the recovery mechanism in the income contingent loans is based on the earnings of the borrower, and for the program to be sustained, higher borrower earnings are required, which results in higher repayments stabilizing the income driven repayment systems (Preston 2023). Hence, an alternate funding mechanism needs to be designed for financing education loans in Australia as well. Moreover, the financial viability of the income driven loan repayment programs without government subsidy is mainly dependent on the repayment behavior of the borrowers, which is poorly understood even in the U.S. (Nerlove 1975).

5.1.3. Cluster 3: Factors Affecting Education Loan Repayment

The review of forty-one studies on factors contributing to educational loan repayment by Gross et al. (2009) found that institutional and student characteristics, student background, social and economic context, academic and college experience, financial grants, aid and scholarship, attitudes towards educational debt, awareness on debt repayment terms, educational attainment, and debt contribute to educational loan default. The study by Bhandary et al. (2023b) systematically reviewed thirty-eight studies on education loan repayment and found themes such as loan defaults, repayment burden, financial education, financial literacy, mental health, student debt, and graduate income. The same study also highlighted salary as the key factor for medical graduates to repay the education loan and suggested that education loan products should be designed based on the intellectual capability of the borrower with service option repayment plans by the employers. In addition, the study suggested that educational institutes should market the education loan product to potential applicants to increase the financial resources of the institute, and insurance can be coupled with education loans to mitigate the loan default risk (Bhandary et al. 2023b).

5.2. Thematic Analysis

5.2.1. Utility Derived and Benefits Associated with Higher Education Availing Education Loan

U.S. citizens with higher levels of education earn more than individuals with lower levels of education and have higher chances of becoming employed. The other benefits linked to higher education from employers include health insurance and pension coverage. Furthermore, higher levels of education lead to better quality of life, material benefits of individuals, healthier lifestyles, and psychological well-being of the citizens. Increased education levels also improve the tax base and increase the tax revenues of the state, resulting in decreased spending on public expenditure by the U.S. government (Baum et al. 2013). An addition of one year of education increases the income level by 10% in Thailand, and student loan provides better access to education and improves the quality of life of the borrower (Chaiya and Ahmad 2022). As per the study in the U.S., education loan repayment might only affect minor decisions in life and the major decisions in life are not affected by the presence of educational debt (Baum and Saunders 1998). Education improves the quality of life of the borrower in the U.S. (Baum et al. 2013), and student loans were found to improve the quality of life of the borrowers in Thailand (Chaiya and Ahmad 2022).

5.2.2. Scholarships, Subsidies, and Grants as Financial Aid

College enrolments increase with an increased eligibility criteria in West Virginia’s PROMISE scholarship in the U.S., and enrolment decreases when the aid eligibility narrows (Biswas and Dasgupta 2023). In the United States, education loan repayment plans are present for doctoral programs in social work under the national institute of health loan repayment program (Burnette and McCleary 2014). Also, scholarships are given, and educational loan repayments are made by the government for nursing staff in exchange for their service in the targeted areas in the U.S. (Thaker et al. 2008). Furthermore, employees working full-time in the government sector or the not-for-profit sector, after completing 120 monthly repayments, and qualifying for the eligibility criteria can apply for the education loan forgiveness program under the public service loan forgiveness program to have their remaining repayments waived (Aid 2018). Also, medical graduates using the public service loan repayment programs increased by 20% after the introduction of the program in 2007, and primary care physicians anticipate using the public service loan forgivingness program rather than using the national health service corps programs specifically designed to promote primary care (Friedman et al. 2016). The same study suggested having targeted measures of loan forgiveness for pursuing careers that the society is in need of and for serving the designated shortage areas.

Financial incentive programs in the form of scholarships, service option education loan repayment programs, and education loans with service requirements in the U.S. have been successful in labor force displacement to the targeted underserved areas and designated sectors in need (Bärnighausen and Bloom 2009). Education loan repayments by the government in the health care sector attract practitioners to the underserved areas is a popular and successful program in the U.S. (Pathman et al. 2013). A survey in Texas, USA showed that more than 50% of the students and residents expressed their willingness to practice in medically underserved areas in exchange for the education loan repayment programs (Price et al. 2009).

5.2.3. Burden Associated with Education Loan

Financial Burden

An educational debt servicing to income ratio beyond 8% is considered as a burden by many authors (Allen and Vaillancourt 2004; Baum and Schwartz 2006; Harrast 2004; Heller 2001; King and Bannon 2002; King and Frishberg 2001; Scherschel 1998; Woodhall 1992). Graduates in Malaysia showcased an educational debt to income ratio varying from 1.8% to 12%, and above 8% was considered unsafe since repayment would be a burden (Zainal and Ismail 2017). The government of Venezuela has established a monthly limit of 15% for education loan repayments and it was noted that educational loan repayment schedules beyond 18% are considered unsustainable (Salmi 2003). Also, the COVID-19 pandemic has caused disruptions in the employment market, changes in income, and has also increased the financial concerns of education loan borrowers in the U.S. (Akana 2021).

In the Indian context, the educational loan repayment to income ratio was 35% at the start of the career of most Indians, and it was 17% towards the end of the repayment tenure considering an average salary of 350,000 per annum at the start of the career with an annual salary hike of 8%, which clearly shows Indian students facing repayment burdens (Jayadev 2017). Moreover, undue hardship occurs when a borrower is not able to maintain a middle-class lifestyle after making education loan repayment in the U.S. (Salvin 1996).

The amount of student loan, education level, income, and employment status contribute significantly to education loan repayment among graduates in Malaysia (Zakaria et al. 2020). The study by Zainal and Ismail (2017) concluded that borrowers prioritized other loan repayments over education loans and the priority for education loan repayment was fifth after considering consumption expenses, car loan repayment, savings, and contribution to parents. Given the scenario of high default rates in education loan repayment in Malaysia, self-sustainability of the education loan product is questionable in the long run (Vaicondam and Wen 2020).

The presence of education loan was found to be an obstacle to build future wealth and it also impacted negatively on the borrower’s future financial well-being in the U.S. (Zhan et al. 2016). Also, for every additional dollar of education loan debt present in the family, there was an associated decrease in farmland ownership in the U.S. (Diosdado et al. 2024). Student loan debt is a major financial burden among Japanese youth, and it negatively affects the family formation (Wang et al. 2024).

Psychological Burden

The presence of education loan was linked to high levels of financial distress in the families with educational debt in the U.S. (Bricker and Thompson 2016). Student loan borrowings had a negative association with the mental health of young adults, and was negatively associated with life satisfaction (Kim and Chatterjee 2019) and poor psychological functioning of the borrower (Walsemann et al. 2015). The education loan repayment burden affected the health of the borrowers who also made timely payments, and those with higher levels of debt in relation to their assets were found to be associated with higher perceived stress and depression (Cho et al. 2015). A study on the pattern analysis of social media sentiments using artificial intelligence regarding education loan repayments revealed the presence of cognitive burden among student loan borrowers, and it was evident with negative emotions, negative sentiments, fear, anger, and sadness (Sinha et al. 2023). Also, students’ perceptions on education debt have different levels on their mental health scores (Cooke et al. 2004). Even though income contingent loan schemes showcased a lower financial burden in comparison to mortgage type loan schemes, the presence of psychological burden could not be ruled out in both these cases. Countries like India and China displayed higher psychological burden when compared to Australia, New Zealand, and Sweden.

5.2.4. Cost–Benefit Analysis

A debt averse attitude among U.S. individuals will influence lower investment behavior in education that is likely to reduce their lifetime earnings and likely to reduce the educational accomplishment levels of their children (Boatman et al. 2017). Also, debt averse students borrow less than other students and enroll in lower costing colleges in the U.S. (Long 2022). Lower social class students fear the burden associated with carrying educational debt, and hence the fear of debt was likely to prevent them from planning for higher education in the U.K. (Callender and Mason 2017). State guaranteed educational loans in the United States, disbursed at the expense of compromised quality in education, resulted in lower wages for the beneficiaries than for those who had not benefitted from the scheme (Rau et al. 2013). Also, students with educational debt levels above USD 10,000 were less likely to complete their graduation in the U.S. (Dwyer et al. 2012). A borrowing education loan is like purchasing a lottery ticket with probabilities of earning higher returns, smaller returns, or even negative returns, and it all depends on borrowing too little or too much that produces the question of how much to borrow (Avery and Turner 2012). The same study also suggests an optimal way to finance college education by calculating part-time workable hours and funding the rest of the amount by loan. Another study suggests limiting higher education loan borrowings to the expected future earnings of one year after graduation (Britt et al. 2017). Also, taking too small of a student loan might result in working too much in part-time jobs, which compromises academic performance, while borrowing too much for a student loan might create financial hardships and delay major purchases in life, delay marriage and having children, and delay investments and savings for children’s education (Britt et al. 2017). The education loan repayment burden affects job choices (Berg et al. 1993) and living standards for law graduates in America (Chambers 1992), and law graduate students in the U.S. with education loan repayment obligations find it difficult to purchase a house (Olivas 1999). The amount of educational debt owed by the borrower was found to be negatively associated with the probability of marriage (Gicheva 2016). Also, educational loan repayment may constrain personal and financial choices including buying a house (Baker et al. 2017). Pathway-based disparities in student loan borrowing behavior reflects barriers that hinder student transfer success in Canada and, even though transfer is promoted as a cost effective access route, it does not result in reduced borrowing (Pizarro Milian et al. 2023).

5.2.5. Higher Education Financing Reforms and Ways Forward

After the world conference held by the United Nations on education for all in the year 1990, significant grants-in-aid were disbursed to the developing and least developed nations, but many of these nations have not efficiently used these grants and aid to achieve self-sufficiency, even though they had the potential to use the recurrent funding through domestic revenues and design a sustainable architecture for education (Lewin 2020). The same study mentioned that post COVID-19, it is unlikely that the grant aid to low-income countries will continue in the same manner as before and therefore it is imperative for these nations to increase their resource allocation efficiency by effectively managing their domestic revenues for sustainable growth and development. Furthermore, most of the developing nations will not sustain the ability to spend public money on education. Hence, the private financing of education is inevitable in the long run (Mingat and Tan 1986). The same study also conducted a cost–benefit analysis of education through education loan and found that in America and Asia, the gains were substantial, and in Africa, the gain was moderate, but it still made sense to shift to the private financing of education. In the study by Christie and Munro (2003), students considered education loans an unavoidable part of the educational experience. Education loans are an important tool for providing accessibility and equity in education, and to make the product sustainable, it is necessary to adopt efficient loan recovery strategies and increase the loan recovery rates (Otieno 2004). The presence of a legal framework to enforce repayment is required in Tanzania to reduce the higher education loan default scenario (Nyahende 2013) and failure to recover education loans hinders the availability of loans to other deserving candidates and undermines the sustainability of the available loan funds.

Higher education financing reforms were studied based on the feasibility of different educational loan schemes for Irish graduates using the life cycle earnings distribution model, and the findings of the simulation indicate that an income contingent loan is more feasible compared to a mortgage-based loan because of the affordability factor and the implied government subsidies (Chapman and Doris 2019). An integrated model of tax collection and education finance based on income contingency was designed in a pareto optimal way, and the optimal education loan repayment schedule was found to be increasing linearly up to a certain point and constant thereafter, in which the welfare gains could be significant (Findeisen and Sachs 2016). The optimal redistribution of wealth and human capital allocation can be implemented through student loans with contingency repayments in the U.S. (Koeniger and Prat 2018). Education loan levels are on the rise in the U.S. and evidence suggest that students have displayed considerable difficulty in repaying their student loans (Lusardi et al. 2016). Student loan borrowers with greater financial self-efficacy and positive problem-solving skills had less difficulty in repaying their student loans in the U.S. (Shim et al. 2019). Also, American students who received financial education in college or through parents were less likely to default their student loan repayments, and even after graduation, if an individual receives financial education in a professional environment, it will result in a reduction in student loan defaults (Fan and Chatterjee 2019). Compulsory education in finance and career research mandates by the state was found to be positively associated with student loan repayment in the U.S. (Mangrum 2022). Educational loans in the U.S. have an ever-increasing demand and the outstanding amount of student loans have surpassed the credit card debt but with an increase in the student loan default rate that necessitates policy changes to address the default challenges (Li 2013). Income and employment disruptions were prevalent globally post the COVID-19 pandemic and a significant portion of education loan borrowers in the U.S. were struggling to make repayments, demanding for policy changes in the U.S. like grant in aid and designing changes in the current income contingent repayment plans (Akana and Ritter 2022). A study in Chile recommends designing higher education loan financing programs in such a manner as to minimize the cost to the state by having an effective student loan recovery mechanism in place so that borrowers should be willing to repay as long as they have the ability to repay (Larraín and Zurita 2008). Hence, higher education financing needs policy reforms for the repayment terms and conditions, and to design the cost structure that minimizes the financial burden on the borrower.

6. Conclusions

Graduates showcased the educational debt servicing to income ratio up to a maximum of 12% in Malaysia, 15% in Venezuela, and 35% in India. Ideally, as per several studies, the ratio should not be more than 8%, and the above scenario clearly states that graduates are facing a high repayment burden. Furthermore, undue hardship in the U.S. is experienced when a borrower is unable to maintain a middle-class lifestyle after making education loan repayment. Also, education loan repayment burden has a significant negative influence for medical residents choosing internal medicine in primary heath care centers as a career option in the U.S. Along with financial burden, students also faced psychological burden that was displayed by negative emotions and sentiments affecting their mental health.

Student loans increase the opportunity for formal education that otherwise would not be accessible, but that should not be at the heavy cost of government subsidies, and neither should it be a burden for students to repay the education loan. In developing, underdeveloped, and least developed countries, the removal or reduction in the government subsidy for education will result in a significant rise in tuition fees, making education accessibility costlier through education loans. Thus, an optimal solution would be a mix of subsidies and loan financing to increase accessibility and provide equitable education. Government spending on higher education and private loan financing are complementary for human capital development and should not be constituted as substitutes since they are supplementary in nature. Hence, higher education can be treated as a social good except in developed economies where it can be jointly produced by the public player (through subsidies) and private players (through loan financing).

Higher education loan financing involves an element of risk, and banks want to cover the risk with collateral. Hence, it leads to market failure because banks do not want to finance without collateral and most of the students are left out because of the absence of collateral. One possible solution to this problem is that the government should act as the insurer, but that again has significant other problems in terms of budgetary allocations, and therefore income contingent student loans can be a feasible solution. Future work can focus on studying the feasibility in designing education loan repayment programs based on a hybrid model of mortgage type and income contingency repayment plans.

This study highlights the need to move towards designing a flexible repayment system in the education loan scheme based on the income contingent schemes adopted in many other countries. Income contingent schemes reduce the repayment burden of the borrowers especially when their income levels are low, and it increases the returns to the lender when the income of the borrower increases. In comparison, mortgage-based schemes have fixed repayment schedules with fixed returns to the lender. Therefore, a dynamic scheme may fix the problems associated with the repayment burden by creating a dynamic link between the benefits received and the contributions made by the borrower. Furthermore, insurance can be coupled with education loan schemes for low value loans without collateral. Also, employers may be empowered to deduct loan installments at source to reduce willful defaults. In addition, the extension of the moratorium period for genuine cases with difficulty in repayment must be incorporated at different intervals in education loan schemes.