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. Last Updated: 07/27/2016

THE ANALYST: Student Loans in Russia Could Help Institutions

Higher education, like almost everything else, is being asked to share the pain of the current economic crisis. The measures recently placed before the Duma include both budget cuts for higher education and a termination of its VAT exemption.

These are major blows to a sector that was already in the midst of a crisis of its own. At a recent conference organized by the International Research and Exchange Board, or IREX, educators invited from all parts of Russia easily reached a consensus on the ills of higher education:

...A Soviet-era curriculum based on the needs of a now-collapsed military-industrial-scientific complex;

...Teaching methods that expect students to spend 30 hours or more in lectures every week, twice the quota of their American counterparts (despite the fact that almost all students work to make ends meet);

...Widespread corruption, with underpaid professors selling grades and cheating. In short, an atmosphere of "you pretend to study, we pretend to teach."

One of the liveliest sessions at the conference focused on financial issues. Everyone agreed that without money, educational reform would languish. But with budget cuts, where will it come from? Some schools survive by renting space to commercial organizations, but hungry tax authorities are intent on skimming the cream even from that cow. Most participants saw tuition as the only realistic source of revenue.

That would be fine if students themselves were not so poor. The New Russians' children study in California, and any increase in tuition for those from ordinary Russian families just forces them to work more hours to pay their school bills, leaving even less time for studies.

Yet education is a solid investment in Russia today. In Moscow, a diploma in the right field, say accounting, finance or communications technology, is worth an extra $1,000 a month in salary, and even in the regions, it is worth at least half that. Given the modest tuition charged by Russian universities, an education can pay for itself in a single year. If students could borrow the money they need for tuition, they could easily repay their loans and come out ahead, while their schools would have a flow of tuition income to pay salaries and upgrade facilities.

Student loans are a basic method of financing higher education in the United States, but there are many barriers to introducing them in Russia. Sky-high interest rates are one. Another is a banking system that makes few loans to anyone, let alone students. Another is a legal system that makes it hard to track down defaulted borrowers and collect from them. Rules that consider loans taxable income are still another problem.

Even in the United States, it took government guarantees and subsidies to get the student loan market off the ground. But funds spent to support a student loan market have a far higher payoff than direct aid to university budgets. Even if loan repayments only covered 80 percent of costs, after defaults and interest subsidies, a loan program could educate five students for the budgetary cost of supporting just one directly.

The Russian government has other things to think about at the moment, but international aid givers could take the lead. Why shouldn't USAID, TACIS or George Soros direct some of the millions they already spend on education reform into a pilot student loan program?

A good place to start would be the Edmund Muskie fellowships that send a handful of Russian students each year for fully paid, two-year MBAs at U.S. business schools. These awards have a fabulous payoff for the lucky few. Young Russians returning to Moscow with an MBA from Wharton or Harvard are getting offers of $5,000 to $10,000 a month from consulting firms and investment banks. Why shouldn't these young titans of finance repay the cost of their education?

If they did, the number of slots in the program could be increased fivefold at no added cost. If the aid agencies complain that they are not equipped to administer student loans, let them enter into a guaranteed partnership with a Russian or international bank to handle administration chores. An existing program sponsored by ABN Amro Bank, which makes loans to Russian business school students in Western Europe, could serve as a model.

Russian students endorse the loan concept. Over the past two years, alumni of the American Institute of Business and Economics in Moscow have contributed several thousand dollars to a financial aid fund for entering students. The alumni have insisted that recipients pledge to repay the financial aid after graduation. Despite this obligation, there are two applicants for every available scholarship. The program hasn't existed long enough to prove itself, but it is off to a promising start.

No single magic bullet is going to solve the problems of Russian higher education any time soon. But student loans, a proven success in the United States, could make a significant contribution. Whose seed money will get the ball rolling?

Edwin G. Dolan is president of the American Institute of Business and Economics in Moscow, and heads its MBA program.