Loan

Definition and description

Loan scheme allows individuals to borrow financial resources (on favourable conditions) from their future income to cover part of their (education and training) expenditure. The State may support the availability of loans and co-finance loan-related costs to encourage participation in adult learning.

To cover tuition fees or living costs during (full time) study, adults might be required to take up a loan. Without support structures, taking up a loan for education and training involves high levels of personal risk, as it is not sure that a started programme will be completed successfully or that a programme will allow an individual to sustain or achieve a well-paid occupation. On the free market, access to loans might be restricted due to missing securities or continuing income. Furthermore, high interest rates and risk premiums might work as a disincentive.

In order to overcome restrictions in access to loans for education and training, various Member States have opened up standard loans – partly in combination with and adding up to grants - also to educational and training purposes. Most frequently, these schemes are aimed at first-time students in higher education, but are also open for adults (25 and older) up to a certain age limit or without such a limit. Moreover, there are examples of loan schemes designed explicitly for adults for (specific) educational and training purposes (e.g. training loan for unemployed people, job seekers and employees aged 45+ in Poland).

About two thirds of EU countries and the UK have loan schemes for education and training purposes in which the government plays some role. Governments are usually involved in setting eligibility, repayment and other rules as well as in monitoring and evaluating implementation of the loan schemes. In several schemes, the government acts as loan provider (through financial institutions). An important government function also includes the provision of subsidies.

The State-supported loans provide solutions beyond credit provision on the private capital market at three fundamental levels:

• Reducing the risk of the (adult) learner: the individual’s risk of taking on a loan may be strongly limited by providing income-contingent loans, where repayment depends on successfully achieving a wage above a pre-defined level.
• Overcoming the difficulties in access to loans: reluctance of banks to provide credits to adult learners might be reduced if banks are not required to bear the risk of credit default. The State (via special bodies) may take on this risk and offer guarantee in case of default.
• Reducing interest rates and improving conditions for repayment: the costs of loans could be reduced by State subsidies (lowering interest rates for the borrowers) or by regulating a particular submarket for loans for educational and training purposes. Finally, the State may support the access to/attractiveness of loans, if repayment of the loan starts only (some time) after completion of the educational and training programme/ grace periods are offered.