INTRODUCTION AND BACKGROUND

Several contemporary Asian economies, including China, Vietnam and Indonesia, have two major things in common: unusually rapid economic growth, and significant expansions of their higher education enrolment and graduation rates. The association between economic growth and growth in higher education is both easy to understand and multi-faceted: as GDP per capita increases, so too does the demand for higher education, with this growth in the skill base of the labour force itself facilitating the economic growth that has helped generate the higher demand for university places. The processes are clearly endogenous.

Many of these economies share another and darker characteristic, which is that they have poorly developed financing systems for higher education. This is an emerging issue for policy because it implies that, even quite soon, the impressive economic growth of the transitional Asian economies could face important constraints with respect to the required expansions in higher education. The most pessimistic of these assessments would allude to the possibility of a country being caught in a ‘middle-income trap’, through the incapacity of its education system to meet the ever-increasing demand for a better-educated labour force.

As far as Indonesia is concerned, it would seem obvious that in order to meet the rising demand for higher education while enhancing quality with limited resources, greater cost sharing with students through increases in tuition fees is unavoidable. It is well known that the only equitable and efficient way to collect significant contributions from students is through the use of a student loan system (Friedman 1955; Chapman 2006), but it is also apparent that Indonesian higher education lacks a well-designed and universal financing mechanism. This chapter explores the implications of the adoption in Indonesia of student loan reforms.

Our approach is to ask, if Indonesia adopted the type of student loan system that is most often used around the world, would this provide a solid foundation to help prevent the growth rates of university enrolments and graduations from stalling? This type of higher education financing system involves government-backed loans provided by banks. It is known as a ‘mortgage-type’ arrangement because loan repayments are made on the basis of pre-determined amounts over a given time period. This is the type of scheme currently used to help finance higher education in many countries, including the United States, Canada, the Philippines and Thailand.