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Student Loans: Are They a Silver Lining or a Heavy Burden?

Starting in January 2023, the first semester of student loan applications will begin. As the number of college students applying for student loans is increasing, there is also a growing number of people voicing their concerns regarding the limitations of student loans. Thus, the Sungkyun Times (SKT) will discuss the concept of student loans, their limitations, and possible solutions.

What Is a Student Loan?

Social Significance of Student Loans

A student loan is a type of loan managed by the Korea Student Aid Foundation (KOSAF) to financially support undergraduate and graduate students so they can better concentrate on their studies. Currently, there are three types of student loans: Income-Contingent Loans (ICL), Direct Loans (DL), and Loans for Rural Students (LRS). ICL supports students under 35 with low, standard median incomes. Under the ICL, borrowers do not have to pay the loan principal amount or interest until their income exceeds a certain threshold for repayment. Meanwhile, the DL targets undergraduate and graduate students under 55. Students using this loan can borrow money for a maximum of 20 years while independently repaying the principal and interest during the grace and repayment periods. Lastly, the LRS focuses on students who have resided in rural areas for more than six months and participate in agricultural activities. Students with this type of support are provided with interest-free tuition. Through these measures, student loans aim to relieve numerous students of financial distress.

The History of Student Loans

The first type of student loan was the Government Guaranteed Student Loan in 2005, established through a collaboration between the Korea Housing Finance Corporation (HF) and the first financial sectors. Later, in 2009, the KOSAF was established to support student loans in order to provide equal access to quality education for all students, regardless of financial circumstances. The loan was mainly proposed due to the steep decrease in university applications of numerous low-income students. The number of students who applied for student loans in 2021 (the second semester of 2020 and the first semester of 2021) was 419,942. Even today, the number of students applying for student loans is increasing every year, including students at Sungkyunkwan University (SKKU). According to the office of Student Affairs, the number of SKKU students that applied for student loans during the first semester of 2022 was 1,067.

Korea Student Aid Foundation (KOSAF) (kosaf.go.kr)

Limitations of Student Loans

Debt-Ridden Students

Students Struggling to Repay Student Loans

Unfortunately, the limitations of the student loan system are clear: they increase the debt burden of the students. Among student loans, ICLs are particularly responsible for causing a considerable burden to students; they require students to take on debts immediately after graduation. Regarding such disadvantages, a senior from the Department of Global Economics at SKKU stated, “Since the debts for student loans are increasing even now, I feel as if I must quickly get a job after graduation.” The problem is that even after the students are employed, they will likely struggle to repay the loans. In fact, according to 2021 data from KOSAF, the number of cases of delay in repaying ICLs in 2021 was 39,345, which was three times higher than that in 2017. What is worse is that delays in repayment can increase the possibility for students to become delinquent borrowers. Such a reality prevents students from applying for new loans and negatively affects their employment, creating a vicious cycle. A 2022 report from the Korea Institute for Health and Social Affairs (KIHASA) explained, “Most of the low-income students are paying off their debts with other debts, and this forms a spiral that leads to a dangerously unstable repayment process.” For these reasons, many students with student loans struggle with debt pressures.

Pressure on the Government

Prolonged repayment delays can also cause a great financial burden to the government, particularly since KOSAF is currently reducing the repayment amount to 70% of their original debts for more than 20,000 students. If the amount of repayment is reduced while the delays increase, it can lead to severe financial damage for the government and its treasury. In reference to cases in the United States (U.S.), where the problem is much more extreme, reducing student loans can become a significant burden on the financial department and cause damaging economic crises such as inflation. Regarding the American situation, Lawrence Summers, the former U.S. Treasury Secretary, claimed, “The reduction in the amount of repayment of the loan can increase the aggregate demand of the economy, which would ultimately lead to high inflation rates.” Moreover, although there are support programs for student loan interest held in private companies and foundations, many students do not know about the existence of these programs due to poor promotion. According to a 2017 survey by KOSAF, 71% of students stated that they did not know such support programs existed. Therefore, a growing number of voices are emphasizing that the core problem of the situation should be solved.

Ways to Move Forward

Efforts of Private Companies

To solve the shortcomings of student loans, efforts in society’s part are essential. One solution would be for private companies to expand their support programs to help reduce debt burdens. For example, Google has created a policy that supports the student loan interests of employees up to $2,500 to reduce their debt pressure. Furthermore, starting last year in Korea, the online game company NCSOFT proposed a post-scholarship policy that supports student loan repayment of up to ₩15 million. Gu Hyeon-bum, Chief Human Resources Officer of NCSOFT, added that “the post-scholarship policy would help the young employees take a big step forward as members of society.” Since NCSOFT is the only Korean company that has introduced this kind of policy, it would be best if other companies could also implement such policies to support students for the social good. In addition, the companies or foundations should actively promote these support programs through social media or websites to promote student involvement and the company’s brand image. Through actively participating in such programs, students will surely be able to reduce the pressure of student loan debts.

Efforts of the Government

The most critical factor in solving student loan issues is engagement on the part of the government. The government should be responsible and offer practical solutions with low financial burdens. First, the government should prevent long-term delays in repayments and the pressures of debt by assisting low-income students through diverse programs. For instance, the government could expand work-study scholarships that target low-income students or increase the proportion of university scholarships to provide practical support to the students. This June, the Ministry of Education and KOSAF selected 2,000 additional students for the national work-study scholarship to help relieve their financial pressures. Through this program, students can earn scholarships by devoting their time and effort. Another solution can be a collaboration between universities, private companies, and the government to identify and support low-income students who have been disregarded through blind spots in the policies. Foremost, since the main reason for the need for student loans is the high tuition fees of universities, the government should consider free education policies. Countries such as Sweden and Denmark have already introduced free tuition policies at the government level to aid students with all kinds of economic conditions to gain higher education. Therefore, if the Korean government utilizes various measures and procedures, all students may equally earn a high level of education.

Expanding Work-Study Scholarships in Universities

Many students are applying for student loans because they can reduce financial instability and academic burdens. Yet, at the same time, their limits are unquestionable: they impose debt pressures on the students and increase the economic distress of the government. For more practical and effective uses of student loans, efforts from society and the government are indispensable. Kingos should also ponder student loan issues for a better society.

유지영  yoojiyoung@g.skku.edu

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