Opinion – Cecilia Machado: Fies debt forgiveness could make new student credit programs unfeasible

Fies’ idea is simple: borrow today to pay tomorrow, as the return to a university degree pays off. The loan guarantees higher salaries and employability to the beneficiaries, allowing them to pay the debt smoothly and in installments over their lifetime. The risk of default is low, and the government acts only to correct eventual failures in the student credit market.

Last week, however, an MP was published that transforms Fies into the exact opposite of what is intended with it: a low-return and high-risk program. The well-intentioned measure establishes a true amnesty for debts: renegotiation with discounts that can reach 92% of the amount owed, reduction of up to 100% of late payment charges and installment payment of the remaining balance in up to 12 years.

The MP still needs to be approved by the Chamber and the Senate, but, based on the opinion of the main presidential candidates on the matter, the debate has everything to be shallow. After all, what is the harm to the country? There are so many businessmen who default, what does it cost to amnesty the boys?

In total, Fies has R$ 123 billion to receive from debtors, according to figures from the most recent General Balance Sheet of the Union. 5 times the budget foreseen for the new Auxílio Brasil. Government officials argue that the measure has no fiscal cost, as the MP deals with loans considered irrecoverable. Not quite.

The amnesty goes against the proposal made by the government’s Public Policy Assessment and Monitoring Council, in a Fies assessment report released just over a year ago: “In view of the observation of the high participation of Fies students in the formal labor market , even in the case of delinquent students, the executive assessment reinforces the need to prioritize the implementation of non-performing credit recovery measures”.

The analysis of the report showed that the participation rate in the labor market of Fies beneficiaries is relatively high during the period of use and even higher in the case of contracts already in the amortization phase. And, even considering only non-performing contracts (in Jan/2019) for more than 360 days, about 56.9% of beneficiaries had formal employment at some point in 2018 and 84% had a formal contract between 2010 and 2018. With remuneration At an average of R$2,356, the installments referring to Fies correspond to only 13% of the income that comes from formal jobs, which could be even lower considering other income.

From the statistics, it is evident that default is not synonymous with inability to pay. On the contrary, it may also be a response to the perception that debts contracted with the government will always be forgiven. This is not the first time that the program has undergone flexibility, and numerous changes have already been made over the years, the biggest in 2010-2014, the period of greatest expansion of Fies, but also in 2020, when payments were suspended due to of the Covid-19 pandemic.

Fies debt forgiveness has two undesirable effects on the student loan market. First, an indiscriminate amnesty, which does not take into account defaulters’ income or ability to pay, creates incentives for everyone to seek renegotiation, including those who have the income to pay off debts. Under favorable conditions, it is better to remain in default to receive amnesty in the future. Due to this first effect, the cost of the program ends up being much higher than what is actually necessary.

Second, if students do not bear part of the cost of their decisions, they may end up taking more risks in their choices, such as, for example, selecting low-quality courses, or universities with very high tuition fees that do not guarantee better salaries after graduation . Due to this second effect, the effectiveness of the program becomes smaller.

In these situations, the economic recipe is clear: it is necessary to create structures to monitor and monitor the income of the credit program beneficiaries, generate incentives for debts to be paid and create mechanisms to execute guarantees and pay the debts of those who can pay and did not. In other words, the exact opposite of amnesty.

Without sharing the costs with beneficiaries, Fies becomes an expensive and ineffective program again. The cost of amnesty is not just the amount of unpaid debts. It is also embedded in Fies’ mischaracterization as a program that primarily serves poor students without access to credit, which encourages them to make good choices about courses and universities, and which has concrete proof in the payment of debts that it is worth funding them. . The normalization of default, on the contrary, carries with it the risk of making any new student loan program unfeasible for future generations.