Student loan

A student loan is designed to help students pay for university tuition, books, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in school. It also differs in many countries in the strict laws regulating renegotiating and bankruptcy.

Australia

Tertiary student places in Australia are usually funded through the HECS-HELP scheme. This funding is in the form of loans that are not normal debts. They are repaid over time via a supplementary tax, using a sliding scale based on taxable income. As a consequence, loan repayments are only made when the former student has income to support the repayments. Discounts are available for early repayment. The scheme is available to citizens and permanent humanitarian visa holders. Means-tested scholarships for living expenses are also available. Special assistance is available to indigenous students.[1]

There has been criticism that the HECS-HELP scheme creates an incentive for people to leave the country after graduation, because those who do not file an Australian tax return do not make any repayments.[2]

Korea

Korea's Student Loan

Korea's student loans are managed by the Korea Student Aid Foundation](KOSAF) which was established in May 2009. According to the governmental philosophy that Korea's future depends on talent development and no student should quit studying due to financial reasons, they help students grow into talents that serve the nation and society as members of Korea. Through the management of Korea's national scholarship programs, student loan programs, and talent development programs, KOSAF offers customized student aid services and student loan program is one of the their major tasks.[3]

Main Loan Programs

Income Contingent Loan (ICL)

For undergraduate students of all grades from low-income households in the 1st through 7th income bracket levels; also, for students (irrespective of income level) from households with three or more children—beginning with the third child. Strong academic performance is part of the eligibility criteria. Loans are not subject to credit approval. Loan applicants must be enrolled for undergraduate study in a postsecondary institution in Korea. Students do not qualify for this loan program if they are in a graduate school, a continuing education program through an academic credit bank system, or a school outside of Korea. Loan must be used for tuition, qualifying school fees, and other specific education-related costs, including living expenses during study. Loan payments may not exceed the student’s financial need; there is no other upper limit on the amount borrowed (loan program permits full coverage of tuition and expenses). In the case of applying loan towards both tuition/school fees and in-study living expenses, the lower limit is KRW 600,000 (at least KRW 100,000 for tuition/school fees plus at least KRW 500,000 for living expenses). Under the income contingent repayment system, a borrower does not have to pay the loan principal amount or interest until he or she has income above a certain minimum threshold level for repayment. Once the borrower’s annual income is greater than the repayment minimum threshold level, the borrower is under obligation to begin repayment.

Direct Loan (DL)

Reduced-interest loans that come from and are guaranteed by the government. Qualifying borrowers, on certain conditions, may be eligible for interest relief offered by the government. For undergraduate and graduate students of any grade level*, from households of any income level. Loan applicants must be enrolled for undergraduate study in a postsecondary institution in Korea. Students do not qualify for this loan program if they are in a continuing education program through an academic credit bank system or a school outside of Korea. Satisfactory academic performance is part of the eligibility criteria. Loans are subject to credit approval. Loan must be used for tuition, qualifying school fees, and other specific education-related costs, including living expenses during study. Loan payments may not exceed the student’s financial need. Depending on the type of school (i.e. undergraduate, graduate), the upper limit on the amount borrowed ranges from KRW 40 million to KRW 90 million. If applying loan towards both tuition/school fees and in-study living expenses, the lower limit is KRW 600,000 (at least KRW 100,000 for tuition/school fees plus at least KRW 500,000 for living expenses). The repayment system offers a borrower grace period of 10 years or less during which payments only need to be made towards the interest on the loan. This maximum period of time is determined by the borrower’s year in school and the remaining number of years within the standard period of the borrower’s program. After the grace period, the borrower is given up to 10 years in which to repay the loan principal amount and interest. The repayment period is dependent upon the borrower.

Loan for Rural Students (LRS)

No-interest loans that come from and are guaranteed by the government. Highlights the customized aspect of the student loans provided through KOSAF. For undergraduate students of all grades and any income level whose parents and guardians have lived at a permanent address in an agriculture and fisheries community area for more than 6 months (180 days) and/or students who have been making a living in the agriculture and fisheries industry for more than 6 months. Students from households with more than three children may be given priority. Loan applicants must be enrolled for undergraduate study in a postsecondary institution in Korea. Students do not qualify for this loan program if they are in a graduate school, a remote (off-campus)/distance learning program, a continuing education program through an academic credit bank system, or a school utside of Korea. Satisfactory academic performance is part of the eligibility criteria. Loan must be used for tuition and qualifying school fees (not including living expenses). Offers full coverage of tuition and qualifying school fees. Loan payments may not exceed the student’s financial need.

Variations

Living Expenses Loan

For undergraduate students whose income level qualifies them for the Income Contingent (Deun-Deun) Student Loan (ICL) and/or the Standard Student Loan (SL) and for graduate students (through the SL). For 1st- or 2nd-year undergraduates, the same academic and income level qualifications for the ICL apply; for 3rd- or 4th-year undergraduates, the academic and income level qualifications for the ICL and the SL apply. Loan must be used for necessary non-tuition, living expenses during the academic year that may include room and board, books and supplies, and transportation costs. The student may determine the amount to borrow in increments of KRW 100,000—from KRW 500,000 to KRW 1 million per semester (or up to KRW 2 million per school year). May receive loan on its own or in combination with a student loan (for school tuition and fees).

KOSAF Loan Conversion Program

For undergraduate and graduate students whose academic and income levels qualify them for the Income Contingent Loan (ICL). Students receiving the Direct Loan (DL) who qualify for the ICL may be eligible to shift from the DL to the ICL. The transition only applies from the school semester during which the loan approval is made. For all previous semesters during which the borrower received the DL, the terms and conditions of the DL fully apply (e.g. the interest accrued on the loan principal each month while the borrower was receiving the DL must be repaid).

Current situation

About 700,000 students borrowed about 2.7 trillion KRW in 2011. KOSAF seeks lower interest rates by issuing direct loans. Since KOSAF issue government-guaranteed bonds, students can borrow directly from the foundation, which reduces their burden on tuition payment

United Kingdom

Student loans in the United Kingdom are primarily provided by the state-owned Student Loans Company. Interest begins to accumulate on each loan payment as soon as the student receives it, but repayment is not required until the start of the next tax year after the student completes (or abandons) their education.

Since 1998, repayments have been collected by HMRC via the tax system, and are calculated based on the borrower's current level of income. If the borrower's income is below a certain threshold (£15,000 per tax year for 2011/2012, £21,000 per tax year for 2012/2013), no repayments are required, though interest continues to accumulate.

Loans are cancelled if the borrower dies or becomes permanently unable to work. Depending on when the loan was taken out and which part of the UK the borrower is from, they may also be cancelled after a certain period of time usually after 30 years, or when the borrower reaches a certain age.

Student loans taken out between 1990 and 1998, in the introductory phase of the UK government's phasing in of student loans, were not subsequently collected through the tax system in following years. The onus was (and still is) on the loan holder to prove their income falls below an annually calculated threshold set by the government if they wish to defer payment of their loan. A portfolio of early student loans from the 1990s was sold, by The Department for Business, Innovation and Skills in 2013. Erudio, a company financially backed by CarVal and Arrow Global was established to process applications for deferment and to manage accounts, following its successful purchasing bid of the loan portfolio in 2013.

United States

In the United States, there are two types of student loans: federal loans sponsored by the federal government and private student loans,[4][5] which broadly includes state-affiliated nonprofits and institutional loans provided by schools.[6] The overwhelming majority of student loans are federal loans.[4] Federal loans can be "subsidized" or "unsubsidized." Interest does not accrue on subsidized loans while the students are in school. Student loans may be offered as part of a total financial aid package that may also include grants, scholarships, and/or work study opportunities.

Prior to 2010, federal loans were also divided between direct loans (which are originated and funded by the federal government) and guaranteed loans, originated and held by private lenders but guaranteed by the government. The guaranteed lending program was eliminated in 2010 because of a widespread perception that the government guarantees boosted student lending companies' profits but did not benefit students by reducing student loan costs.[4][7]

Federal student loans are generally less expensive than private student loans. However, the federal student lending program still generates billions of dollars in profit for the government each year, because the interest payments exceed the government's own borrowing costs, loan losses, and administrative costs. Losses on student loans are extremely low, even when students default, in part because these loans cannot be discharged in bankruptcy unless repaying the loan would create an "undue hardship" for the student borrower and his or her dependents.[4][8] In 2005, the bankruptcy laws were changed so that private educational loans also could not be readily discharged. Supporters of this change claimed that it would reduce student loan interest rates.

Income-Based Repayment

The Income-Based Repayment plan is an alternative to paying back student loans, which allow the borrowers to pay back loans based on how much they make, and not based how much money is actually owed.[9] However, income based repayment does not apply to private loans.[10]

IBR plans generally cap loan payments at 10 percent of the student borrower's income. Interest accrues and the balance continues to build. However, after a certain number of years, the balance of the loan is forgiven. This period is 10 years if the student borrower works in the public sector (government or a nonprofit) and 25 years if the student works at a for-profit. Debt forgiveness is treated as taxable income, but can be excluded as taxable under certain circumstances, like bankruptcy and insolvency.[11]

Scholars have criticized IBR plans on the grounds that they create moral hazard and suffer from adverse selection. That is, IBR may encourage student borrowers who could have obtained high-wage jobs to take low wage jobs with good benefits and minimal work hours to reduce their loan payments, thereby driving up the cost of the IBR program. And, if IBR programs are optional, only students who expect to have low wages will opt into the program. Historically, a number of IBR programs have collapsed because of these problems.[4][12]

Qualification

Most college students in the United States qualify for federal student loans.[13] Students can borrow the same amount of money, at the same price, regardless of their own income or their parents' incomes, regardless of their expected future income, and regardless of their credit history. Only students who have defaulted on federal student loans or have been convicted of drug offenses are excluded.

The amount students can borrow each year depends on their education level (undergraduate or graduate), and their status as dependent or independent. Undergraduates may receive lower interest rates than graduate students, but graduate students can typically borrow more per year.[4][7]

Private lenders may use different underwriting criteria, including income level, parents' income level, and other financial considerations. Students will generally only borrow from private lenders when they exhaust the maximum borrowing limit under federal loans. Several scholars have advocated eliminating the borrowing limit on federal loans and enabling students to borrow according to their needs (tuition plus living expenses) and thereby eliminating high-cost private loans.[4][7]

Repayment

Federal student loan interest rates are established by Congress and listed in § 20 U.S.C. § 1087E(b). Because the interest rates are established by Congress, interest rates are a political decision. The federal student loan program currently runs a multibillion dollar "negative subsidy", or profit, for the federal government. Some scholars have suggested that federal student loan interest rates should be tailored to particular courses of study and reflect the riskiness of those different courses of study. They have also suggested that the program should be run at cost, or below cost, because of the benefits an educated workforce provides to society—lower burdens on public services, lower health costs, higher wages and tax revenues, lower unemployment.[4][14][15]

Repayment typically begins anywhere from six to twelve months after a student leaves school, regardless of whether or not they complete their degree program. In some cases, repayment begins if course load drops to half time or less, so it is important to check the exact terms and conditions of any student loan.

The student may have multiple options for extending the repayment period, although an extension of the loan term will likely reduce the monthly payment, it will also increase the amount of total interest paid on the principle balance during the life of the loan. Extension options include extended payment periods offered by the original lender and federal loan consolidation. There are also other extension options including income sensitive repayment plans and hardship deferments. Extensions and consolidation will also add to the principal, many times unpaid interest and penalties become capitalized.

The Master Promissory Note is an agreement between the lender and the borrower that promises to repay the loan. It is a binding legal contract.

Criticism

Occupy Boston activist Nelson Terry at the Occupy Wall Street event in New York protesting student loan debt, September 19, 2011

In coverage through established media outlets, many borrowers have expressed feelings of victimization by the student loan corporations.[16][17][18] There is a comparison between these accounts and the college credit card trend in America during the 2000s, though the amounts owed by students on their student loans are almost always higher than the amount owed on credit cards.[19] Many anecdotal accounts of the hardships caused by excessive student loan debt levels are chronicled by the organization Student Loan Justice which is founded and led by consumer rights advocate and author Alan Collinge.[20] Student loans cannot be discharged in a bankruptcy proceeding unless the debtor can demonstrate "undue hardship."[21]

There are many documented cases of Americans committing extreme actions because of large student loan balances. This seems particularly true in the case of private loan balances.[22] After the passage of the bankruptcy reform bill of 2005, even private student loans are not discharged during bankruptcy. This provided a credit risk free loan for the lender, averaging 7 percent a year.[23]

Increasing student loans have also been blamed for driving tuition costs up. As Cato Institute economist Neal McCluskey explained in an April 2012 article for U.S. World & News Report: "The basic problem is simple: Give everyone $100 to pay for higher education and colleges will raise their prices by $100, negating the value of the aid. And inflation-adjusted aid--most of it federal--has certainly gone up, ballooning from $4,602 per undergraduate in 1990-91 to $12,455 in 2010-11." [24]

In 2007, the Attorney General of New York State, Andrew Cuomo, led an investigation into lending practices and anti-competitive relationships between student lenders and universities. Specifically, many universities steered student borrowers to "preferred lenders" which resulted in those borrowers incurring higher interest rates. Some of these "preferred lenders" allegedly rewarded university financial aid staff with "kick backs." This has led to changes in lending policy at many major American universities. Many universities have also rebated millions of dollars in fees back to affected borrowers.[25][26]

The biggest lenders, Sallie Mae and Nelnet, are frequently criticized by borrowers. These lenders often find themselves embroiled in lawsuits, the most serious of which was filed in 2007. The false claims suit was filed on behalf of the federal government by former Department of Education researcher Jon Oberg against Sallie Mae, Nelnet, and other lenders. Oberg argued that the lenders overcharged the U.S. government and defrauded taxpayers of millions and millions of dollars. In August 2010, Nelnet settled the lawsuit and paid $55 million.[27]

The New York Times published an editorial in August 2011 endorsing the return of bankruptcy protections for private student loans in response to the economic downturn and universally increasing tuition at all colleges and graduate institutions.[28]

As of 2013, many economists are predicting a new economic crisis will emerge as a result of an estimated $1 trillion of student loan debt currently impacting two thirds of graduating college students in America.[29]

See also

References

  1. ↑ "Paying for your studies (HELP loans)". Goingtouni.gov.au. Retrieved 2010-09-07.
  2. ↑ Free Uni for Artful Dodgers Incentives for Australians to leave the country after graduation (Retrieved 2014-08-22)
  3. ↑ ko:한국장학재단
  4. ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Michael Simkovic, Risk-Based Student Loans (2012)
  5. ↑ Kantrowitz, Mark (2010-03-26). "Student Loans - The New York Times". Nytimes.com. Retrieved 2010-09-07.
  6. ↑ Consumer Financial Protection Bureau. (2012) Private Student Loans. See also: Report Details Woes of Student Loan Debt. NYT.
  7. ↑ 7.0 7.1 7.2 Jonathan Glater, The Other Big Test: Why Congress Should Allow College Students to Borrow More Through Federal Aid Programs, 14 N.Y.U. J. LEGIS. & PUB. POL’Y 11, 37 (2011)
  8. ↑ John A. E. Pottow, The Nondischargeability of Student Loans in Personal Bankruptcy Proceedings: The Search for a Theory, 44 CAN. BUS. L.J. 245, 249-250 (2006)
  9. ↑ "Student Aid on the Web". Studentaid.ed.gov. Retrieved 2012-04-24.
  10. ↑ "Loans | Repayment Plans | Income-Based Repayment". FinAid. Retrieved 2012-04-24.
  11. ↑ Philip G. Schrag & Charles W. Pruett, Coordinating Loan Repayment Assistance Programs with New Federal Legislation, 60 J. LEGAL EDUC. 583, 590-597 (2010)
  12. ↑ Robert J. Shiller, THE NEW FINANCIAL ORDER: RISK IN THE 21ST CENTURY (2003).
  13. ↑ "StudentLoans.gov". Retrieved 3 January 2014.
  14. ↑ OECD, Education at a Glance (2011)
  15. ↑ DEBORAH KALCEVIC & JUSTIN HUMPHREY, CONGRESSIONAL BUDGET OFFICE, CBO MARCH 2012 BASELINE PROJECTIONS FOR THE STUDENT LOAN AND PELL GRANT PROGRAMS, Tables 2, 3
  16. ↑ "Student Loan Stories . NOW on PBS". Pbs.org. Retrieved 2010-09-07.
  17. ↑ "Anderson Cooper 360: Blog Archive - Student Loan Nightmare: Help Wanted « - CNN.com Blogs". Ac360.blogs.cnn.com. 2009-03-30. Retrieved 2010-09-07.
  18. ↑ Fetterman, Mindy (2006-11-22). "Young people struggle to deal with kiss of debt". Usatoday.Com. Retrieved 2010-09-07.
  19. ↑ Kurt SollerFebruary 17, 2009 (2009-02-17). "Credit Card Issuers Still Target College Students". Newsweek. Retrieved 2010-09-07.
  20. ↑ "StudentLoanJustice.Org". StudentLoanJustice.Org. Retrieved 2012-04-24.
  21. ↑ "Liz Pulliam Weston: Good and bad student loan debt - MSN Money". Articles.moneycentral.msn.com. Retrieved 2010-09-07.
  22. ↑ "College grads take extreme measures to repay student loans". http://www.walletpop.com. Retrieved 2011-04-15.
  23. ↑ Collinge, Alan. The student loan scam : the most oppressive debt in U.S. history, and how we can fight back. Boston, MA : Beacon Press, c2009. ISBN 978-0-8070-4229-8 http://lccn.loc.gov/2008012230
  24. ↑ http://mercatus.org/expert_commentary/subsidized-loans-drive-college-tuition-student-debt-record-levels
  25. ↑ "Cuomo: School loan corruption widespread". U.S.A. Today. April 10, 2007. Retrieved 2008-04-08.
  26. ↑ Lederman, Doug (May 15, 2007). "The First Casualty". Inside Higher Education. Retrieved 2008-04-08.
  27. ↑ Field, Kelly (August 15, 2010). "Nelnet to Pay $55 Million to Resolve Whistle Blower Lawsuit". The Chronicle of Higher Education. Retrieved 2011-07-14.
  28. ↑ "Relief for Student Debtors". The New York Times. 2011-08-26.
  29. ↑ Denhart, Chris. "How The $1.2 Trillion College Debt Crisis Is Crippling Students, Parents And The Economy". Forbes.

Further reading

External links

Look up student loan in Wiktionary, the free dictionary.