EUROPE: Do loans create an indebted generation?

The European Commission recently published an agenda for the modernisation of Europe's higher education systems, which is a revamp of its 2006 plan. It is important to remember that the commission exists to support national higher education efforts, but its role is crucial, particularly with regard to funding.

The commission is seeking to increase the budget share from the central European Union financial framework from 2014 onwards by more than 70%. That is money invested directly in more student mobility grants, more cooperation support and more action on policy issues.

But more importantly, while the overall EU budget is set to remain approximately the same size, the big increase in higher education investment sends an important message.

If we consider that the potential of our universities is still hidden to a degree and that we need to do something to release it, then the announcement is a clear communication that greater investment is needed.

The commission does not put it so bluntly, but its actions hopefully speak for themselves. We must bear in mind that traditionally, spending on education has been tiny compared to the overall size of the EU budget - the sum proposed represents only around EUR15 billion (US$21.3 billion) of an overall EUR1 trillion budget. However, universities will also benefit from the research and innovation budget and cohesion funds.

Interestingly, the announcement focuses on two crucial issues that are of great importance to the success of higher education and the role it can play in personal, societal and economic development. Namely, that we need to do more to unleash the potential of every individual by widening participation, and that we need an education system that is more attuned to the needs of society and the labour market.

This means that teaching and learning needs to become more student-centred, focusing on building competence and keeping citizens active for longer.

Europe has long decided that encouraging greater mobility of students and staff plays a key role in bringing down barriers to learning and freedom.

The commission has been at the forefront of promoting mobility, through specific policies and initiatives such as the Erasmus programme, which has sent more than two million students for a period of study in another country in Europe since it was inaugurated.

The Erasmus generation is ultimately European, but also more adaptable to social and economic change. Being able to study in different countries enables students to become better in transversal skills, which have a great long-term value.

Erasmus has been based on providing grants and it has also been tuition-free - students are not required to pay the fees of the institutions at which they spend time abroad.

The commission now seems eager to try something new - awarding a loan guarantee of EUR100 million a year to help masters students fund full degree study abroad. In the past, mobility has been limited for such students as most financial help with fees has been for national-level study.

Thus a student from a lower socio-economic background would face an uphill struggle to find the funds to do a full degree in another country in Europe. The commission therefore has a good target audience and it knows what that audience needs, following a feasibility study that it carried out.

However, this new policy also sends another signal to governments - invest in higher education, but do it through loans so that students also contribute to the costs.

Loans are nothing new and many governments have put them in place, often with the endorsement of students, especially when schemes are designed to have so-called progressive elements like income contingent repayments, grace periods and subsidised interest rates.

All of these have also been proposed by the feasibility study, which also envisages a new EU institution that will manage a portfolio of EUR60 billion, which in the current political climate appears unimaginable.

The plan is not a concrete proposal, but an idea for guaranteeing such loans through private banks (those that the governments still keep on bailing out). Thus we can only guess what the real conditions of the loans would be for students. No current study, including the feasibility study, has examined the actual attractiveness of such loans.

Secondly, the commission seems to be expecting everybody to immediately jump at the opportunity to endorse its idea even though there is not much detail about it and there has been no meaningful democratic dialogue with member states and citizens.

Thirdly, guaranteeing such loans needs to give students more than what member states are doing already for students, and must not act as a disincentive for governments making their own funds available for mobile study, something that has been a key promise of Bologna process ministers since 1999.

Fourthly, given that the scheme involves private banks, it is doubtful whether these could offer subsidies or tie repayments to students' later earnings. Such a scheme would not take into account individual financial gains or losses since higher education will not yield huge fortunes to graduates by itself.

Thus the scheme actually doesn't appear to provide many options for increasing social mobility, as the loans are likely to be expensive and poorer students are more debt-averse.

Finally, one wonders if this scheme represents a change in the European Commission's approach to funding streams. The commission has stated publicly that it still considers grants to be important and that loans are simply an additional means of funding students.

But we surely need to admit that rising youth unemployment and an increasing graduate debt burden might become an explosive mix, leading to greater social divisions between young and old.

What goes through the heads of this generation? How will such schemes affect today's and tomorrow's indebted generation of graduates? How will they affect graduates' plans to become parents and build capital for the future, for pension and increasing healthcare costs?

Of course, some economists do not consider this a long-term problem, but the perception that it might be is there and, as history has shown, perceptions are sometimes enough to provoke a reaction.

* Allan Pall is chairperson of the European Students' Union.