Student loan

From Wikipedia, the free encyclopedia

A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. It may differ from other types of loans in the fact 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. This article highlights the differences of the student loan system in several major countries.

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]

Canada

The province of British Columbia allows the Insurance Corporation of British Columbia to withhold issuance or renewal of driver's license to those with delinquent student loan repayments or child support payments or unpaid court fines.[3]

France

Germany

New Zealand

New Zealand provides student loans and allowances to tertiary students who satisfy the funding criteria. Full-time students can claim loans for both fees and living costs while part-time students can only claim training institution fees. While the borrower is a resident of New Zealand, no interest is charged on the loan. Loans are repaid when the borrower starts working and has income above the minimum threshold, once this occurs employers will deduct the student loan repayments from the salary at a fixed 12c in the dollar rate and these are collected by the New Zealand tax authority.

South Korea

South 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.[4] 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 their major tasks.[5][unreliable source]

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.[6]

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.

There are complaints that graduates who have fully repaid their loans are still having £300 a month taken from their accounts and cannot get this stopped.[7]

United States

In the United States, there are two types of student loans: federal loans sponsored by the federal government and private student loans,[8][9] which broadly includes state-affiliated nonprofits and institutional loans provided by schools.[10] The overwhelming majority of student loans are federal loans.[8] 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. Whereas interest for most business investments is tax deductible, Student loan interest is generally not deductible. Critics contend that tax disadvantages to investments in education contribute to a shortage of educated labor, inefficiency, and slower economic growth.[11][12]

Prior to 2010, federal loans were also divided into 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.[8][13]

Federal student loans are 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.[8][14] 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; critics said it would increase the lenders' profit.

Income-Based Repayment

The Income-Based Repayment (IBR) plan is an alternative to paying back federal student loans, which allows the borrowers to pay back loans based on how much they make, and not based how much money is actually owed.[15] Income-based repayment is a federal program and is not available for private loans.[16]

IBR plans generally cap loan payments at 10 percent of the student borrower's income. Deferred interest accrues, and the balance owed grows. 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.[17][18]

Scholars have criticized IBR plans on the grounds that they create moral hazard and suffer from adverse selection. That is, IBR and PAYE encourages students to borrow as much as possible for as long as possible and largely for personal (indirect) expenses (not tuition and fees), particularly at the graduate level where there is no limit on borrowing (up to $138,500 in Staffords plus unlimited Graduate plus loans) and steer those 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 have the highest debts relative to wages will opt into the program. For example, due to formula to qualify, the vast majority of students with debts exceeding $100,000 will qualify even if earning at or near the median salary, thus they have no incentive to borrow responsibly. Historically, a number of IBR programs have collapsed because of these problems.[8][19]

Qualification

Most college students in the United States qualify for federal student loans.[20] 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, and have not completed a rehabilitation program, 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 are eligible for subsidized loans, with no interest while the student is in school. Graduate students can borrow more per year.[8][13] (Graduate and professional schools are expensive and less aid of other types is available.)

Private lenders use different underwriting criteria, including credit rating, income level, parents' income level, and other financial considerations. Students only borrow from private lenders when they exhaust the maximum borrowing limits 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.[8][13]

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 (2010) runs a multibillion-dollar "negative subsidy", or profit, for the federal government. Loans to graduate and professional students are especially profitable because of high interest rates and low default rates.[21] 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.[8][22][23]

Repayment typically begins anywhere from six to twelve months after a student leaves school, regardless of whether or not they complete their degree program. Usually repayment begins if course load drops to half time or less.

With federal student loans the student may have multiple options for extending the repayment period, but though an extension of the loan term will reduce the monthly payment, it will also increase the amount of total interest paid on the principle balance during the life of the loan (the unpaid interest and any penalties become capitalized, i.e. added to the loan balance). 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.

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 City 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.[24][25][26] 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.[27] 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.[28] Student loans cannot be discharged in a bankruptcy proceeding unless the debtor can demonstrate "undue hardship."[29] 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.[30]

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." [31] However, most peer-reviewed studies by economists do not support this claim.[8]

In 2007, Andrew Cuomo, then Attorney General of New York State, 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 "kickbacks". 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.[32][33]

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.[34]

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.[35]

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.[36] However, most economists and investors believe that there is no student loan bubble.[37]

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. ^ Kines, Lindsay (March 12, 2015). "Pay debts or put your driver's licence at risk; ICBC asked to collect on student loans, court fines". Times - Colonist. Victoria, British Columbia. p. S5. 
  4. ^ "50 Euro Lenen met een Minilening". 50 Euro Lenen. Retrieved 15 May 2017. 
  5. ^ ko:한국장학재단
  6. ^ "Klein bedrag lenen - Vergelijk minilening aanbieders! - Minilening, Mini lening". Klein bedrag lenen. 
  7. ^ Student loans: graduates still face cash grabs of £300 a month The Guardian
  8. ^ a b c d e f g h i Michael Simkovic, Risk-Based Student Loans (2012)
  9. ^ Kantrowitz, Mark (2010-03-26). "Student Loans". The New York Times. Retrieved 2010-09-07. 
  10. ^ Consumer Financial Protection Bureau. (2012) Private Student Loans. See also: Report Details Woes of Student Loan Debt. NYT.
  11. ^ Simkovic, Michael (2015). "The Knowledge Tax". The University of Chicago Law Review. SSRN 2551567Freely accessible. 
  12. ^ Simkovic, Michael (2016). "Taxes, Subsidies, and Knowledge: A Reply to Professor Oei". University of Chicago Law Review Dialogue. SSRN 2761682Freely accessible. 
  13. ^ a b c 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)
  14. ^ 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)
  15. ^ "Student Aid on the Web". Studentaid.ed.gov. Retrieved 2012-04-24. 
  16. ^ "Loans | Repayment Plans | Income-Based Repayment". FinAid. Retrieved 2012-04-24. 
  17. ^ Philip G. Schrag & Charles W. Pruett, Coordinating Loan Repayment Assistance Programs with New Federal Legislation, 60 J. LEGAL EDUC. 583, 590-597 (2010)
  18. ^ "6 Must-Know Facts About Income-Based Repayment". 29 September 2016. 
  19. ^ Robert J. Shiller, THE NEW FINANCIAL ORDER: RISK IN THE 21ST CENTURY (2003).
  20. ^ "StudentLoans.gov". Retrieved 3 January 2014. 
  21. ^ "Brian Leiter's Law School Reports". leiterlawschool.typepad.com. Retrieved 2015-11-15. 
  22. ^ OECD, Education at a Glance (2011)
  23. ^ DEBORAH KALCEVIC & JUSTIN HUMPHREY, CONGRESSIONAL BUDGET OFFICE, CBO MARCH 2012 BASELINE PROJECTIONS FOR THE STUDENT LOAN AND PELL GRANT PROGRAMS, Tables 2, 3
  24. ^ "Student Loan Stories . NOW on PBS". Pbs.org. Retrieved 2010-09-07. 
  25. ^ "Anderson Cooper 360: Blog Archive - Student Loan Nightmare: Help Wanted « - CNN.com Blogs". Ac360.blogs.cnn.com. 2009-03-30. Retrieved 2010-09-07. 
  26. ^ Fetterman, Mindy (2006-11-22). "Young people struggle to deal with kiss of debt". Usatoday.Com. Retrieved 2010-09-07. 
  27. ^ Kurt SollerFebruary 17, 2009 (2009-02-17). "Credit Card Issuers Still Target College Students". Newsweek. Retrieved 2010-09-07. 
  28. ^ "StudentLoanJustice.Org". StudentLoanJustice.Org. Retrieved 2012-04-24. 
  29. ^ "Liz Pulliam Weston: Good and bad student loan debt - MSN Money". Articles.moneycentral.msn.com. Retrieved 2010-09-07. 
  30. ^ Collinge, Alan (2009). The Student Loan Scam: The Most Oppressive Debt in U.S. History, and how We Can Fight Back. Boston, MA: Beacon Press. ISBN 9780807042298. 
  31. ^ "Subsidized Loans Drive College Tuition, Student Debt to Record Levels". 12 July 2013. 
  32. ^ "Cuomo: School loan corruption widespread". U.S.A. Today. April 10, 2007. Retrieved 2008-04-08. 
  33. ^ Lederman, Doug (May 15, 2007). "The First Casualty". Inside Higher Education. Retrieved 2008-04-08. 
  34. ^ Field, Kelly (August 15, 2010). "Nelnet to Pay $55 Million to Resolve Whistle Blower Lawsuit". The Chronicle of Higher Education. Retrieved 2011-07-14. 
  35. ^ "Relief for Student Debtors". The New York Times. 2011-08-26. 
  36. ^ Denhart, Chris. "How The $1.2 Trillion College Debt Crisis Is Crippling Students, Parents And The Economy". Forbes. 
  37. ^ Bidwell, Allie (2014). "Why Student Debt Won't Cause the Economy to Collapse" – via U.S. News. 

Further reading

  • Manning, Robert D. (1999). “Credit Cards on Campus: The Social Costs and Consequences of Student Debt.” Washington, D.C.: Consumer Federation of America.
  • Schemo, Diana Jean, "Private Loans Deepen a Crisis in Student Debt", The New York Times, June 10, 2007
  • "New Default Rate Data for Federal Student Loans: 44% of Defaulters Attended For-Profit Institutions", The Pew Charitable Trusts, Project on Student Debt, Berkeley, California, December 15, 2009
  • Studentaid.ed.gov on Federal Perkins Loan Teacher Cancellation

External links

  • "UNITED NATIONS: Education Policy and Reform"
  • "Big Money On Campus". U.S. News & World Report. October 19, 2003.
  • "College, Inc.", PBS FRONTLINE documentary, May 4, 2010
  • "All You Need To Know About College Grants", Student Loan Refinance Tips, Advice & Review
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