Who can earn risk-free profit? : Possibility of Arbitrage in the Hungarian Student Loan System

Abstract

People without tertiary educational attainment are more affected by poverty. Thus, obtaining a higher degree of education can act as a key to pulling sections of society out of the poverty trap. In higher education, Hungary has a dual-track tuition policy, which offers restricted merit-based entry to state-funded universities, leading to entirely free higher education for a limited number of students. As the most disadvantaged students perform worse at secondary school, their chances of being enrolled in free tertiary education are much lower. To improve equity, students have access to a well-designed student loan system in Hungary. This study demonstrates that Hungary’s higher education funding policy is currently further widening the gap between the rich and the poor, as holding a Student Loan 1 and a Hungarian Government Security Plus (MÁP Plusz) position results in arbitrage for those who do not need to borrow to finance their tuition fee and living expenses during the academic years. Instead of supporting the catchingup process for students coming from low-income backgrounds, the Hungarian system provides additional financial aid to advantaged students. Based on an international comparison of student loan schemes, adopting a targeted approach instead of a universal one might be worthy of consideration, e.g. providing an interest rate subsidy to disadvantaged students or setting a lower income level of the student’s household as an eligibility criterion for borrowing.