STUDENT LOANS

13 07 2009

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(A Followup to “So Much Eloquence”)

I always enjoy comparing US arrangements on various money matters with the parallel arrangements in other countries. So many surprises! This is supposed to be the greatest country in the world, isn’t it? And a land of opportunity to boot?

Here is some material from comments to a newspaper column on student loans.

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Student Loans Here

Student loans are made to students by banks at a rate to be determined later, by consulting prevailing interest rates  as of  about six months after the student graduates (which is when the student’s payback period begins) and adding a premium to that. The bank receives a government guarantee of the loan when the bank makes it, so the bank runs no risk in making the loan. Nevertheless, interest rates are not commensurate with the complete absence of risk on the part of the lender.

Student loans are not dischargable in bankruptcy. And whatever loan rate you got at the outset of your payback period, you’re stuck with it. A special law passed a few years ago prohibits the debtor from refinancing at any time later in his or her life when prevailing interest rates go down.

Oh yes, each school chooses which lender will be allowed to offer student loans through the school, offering great opportunities for the banks to bribe school administrators for access to a captive clientele of students.

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In Australia

http://community.nytimes.com/article/comments/2009/06/04/opinion/04collins.html?permid=29#comment29

“In Australia, all student loans are granted through the Federal Government, with no interest, except for increases in inflation. Paying university/college fees upfront makes you eligible to a discount of 20%. There is simply no rational purpose for “private” student loan operators.”

— Obiter, Melbourne, Australia

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In Great Britain

http://community.nytimes.com/article/comments/2009/06/04/opinion/04collins.html?permid=27#comment27

“I have experience of a government student loan scheme; when it came time to choose colleges I had the option to stay in the UK and go to college as a ‘UK resident’. And I am so, so glad that I chose to do that and didn’t go and get sucked into student loans in the US.

The UK does have a much lower fee structure – about like state colleges. They have some grants for low income students. They have assessed parental contributions. But most students will pay for most of their college by using a government loan.

The interest rate on the loan is subsidized – it’s kept at 1% above the current inflation rate. So right now, students here are repaying less than 2% interest. Interest isn’t charged until you leave college. And because the government organises it, they can take the repayments by garnishing your salary, like a payroll tax. Oh, and did I say that if you take a low-income job (below £15,000, or about $26,000), they don’t take any repayments out? Same goes for being unemployed.

The net result is that while you may have a pretty big student loan, repaying it is never a nightmare. You only repay when you’re earning an above-average salary. The repayments are automatic unless you’re self-employed, and if you are, they get calculated when you pay your end-of-year taxes. The interest rates aren’t punitive. If I leave the country, they’ll work out a repayment plan with me.

I had freedom of choice – and I chose the government loan system.”

— Pip, London

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