|▲ Dongguk University students could get help from student loan counseling center located in Student Service Center|
“I am neither poor nor needy, and my parents earn sufficient amounts of money for living. However, we have had to spend an excessive amount of money for my grandmother’s hospital fees. Therefore I chose to take out a student loan from a nonmonetary institution. Now I feel like I am a delinquent borrower because of these deadly interest rates.” (31 years old, Mr. B)
“I took out a student loan for as much money as I needed in order to buy textbooks and for living expenses. I feel so hopeless when I think about my situation of having to repay this loan after I graduate.” (22 years old, Ms. C)
“I submitted an application for a student loan, but my application was deemed to be below the evaluation standard and it was therefore eliminated. After that, I looked at nonmonetary institutions. Now I am thinking about working in the military and quitting university.” (21 years old, Mr. D)
According to the Financial Services Commission, based on their 2011 data, 355,699 college students out of 2,890,000 have taken out student loan and 110,000 of them have loans with interest rates over 20% per year. Among them, 39,000 students took out usurious private loans. From research taken in May 2012 we can learn that the number of students with high interest rates overdue is 25,084, which estimates to a total of 99,678,000,000 won.
“Campus Poor” are students who take loans and cannot repay them or have a hard time repaying them. The problem for these people is that they suffer financially to repay these loans, therefore leading to higher than average marriage age and producing a negative impact towards the domestic economy and society as a whole.
Educational expenses include not only tuition fees, but also living expenses. The kinds of student loans that can be borrowed for educational expenses from the government and KOSAF (Korea Student Aid Foundation) are categorized into three. The first is the Deun Deun Student loan, which targets undergraduates within the 7th class of income standards. Its interest rate is 2.9% and the loan does not have to be repaid until students find a job. The second is the Ordinal Student Loan, which targets both undergraduates and graduates within the 8th class of income standards. Its interest rate is 2.9% and gives 10 free years before repayment. The third is the Farming and Fishing Student Loan, which targets undergraduates with no other conditions except that they must live in farming or fishing region. Each year this loan must be repaid for the amount borrowed per semester but there is no interest. Those who fail in their student loan application usually look for nonmonetary institutions to provide them with loans where the lowest interest rate is 1.5% a month, which results in 18% per year to the highest which is 39% per year. Students typically borrow 1,000,000 won to 20,000,000 won. With the high interest rates this can be very dangerous.
Why do students need student loan? The purpose of these loans is to reduce the tuition fee burden of students so that they can concentrate on their studies. In Korea, the percentage of people who receive higher education such as university education is 63%, being the highest among OECD members. Also, the expense of higher education when compared to GDP is 2.6% are relatively high compared to the average figure of that of other OECD members at 1.5%. Student loans are needed because students pay too much money on education.
How did student loans develop? Student loans began with interest preservation by the Government Employees Pension Corporation, but as financial institutions were in charge of loans, students with low credit rating were unable to use the loans and found it hard to increase the scale of them. In order to solve this problem, the system changed to credit guarantee student loans, and KOSAF was founded and started the three types of student loans based on legislation enforced since February 6th, 2009.
One student who has graduated from Dongguk says that the student loan process is not as easy as it seems. Since student loans are limited, there is a lot of competition so getting a loan is very difficult. Kim Hye-lim, also a student at Dongguk, says that the stress of applying for a loan is as bad as the burden of repayment, as she has to worry each semester if she will receive one. Students want a steady and secure loan for the whole of their university life and not just a chance for one each year.
As mentioned above, there are several problems with student loan even though they have changed a lot. For instance, even with the interest rate of 2.9%, which is a very low, a student should repay about 8,000,000 won for interest on average. If a student borrows money from a bank, the interest rate rises to a minimum 7.9% so that one should pay an additional 23,000,000 won. Even worse, when a student visits a nonmonetary institution, interest rates skyrocket to a minimum of 19% to a maximum of 39%. In these cases, one should pay three times of what he or she has borrowed. The credit rating of these students can be damaged very easily.
According to KOSAF, a person with debt will be disadvantaged when they look for a job. Especially in companies related to finance or those that check a potential employee’s personal credit history. If there is data of procrastination of payments, he or she may be limited in finance businesses or when working with banks.
Because of these problems, a certain social effect occurs, which has been called the “Poor Cycle.” The “Poor Cycle” is a domino effect which starts from the lack of economic stability. It starts as campus poor and progresses to working poor. This then leads to people being unable to save money because of their low income or high debt. It eventually leads to becoming the honeymoon poor when a couple has to pour their whole savings into their marriage or honeymoon. The honeymoon poor then become the rent poor after they choose to buy or rent a house. Some couples can never afford to buy a house and therefore end up paying rent their entire lives. Edu-poor is the next step when parents should pay for their child’s education and usually the edu-poor turn back into the campus poor and the cycle continues with the new child. The final stage of the cycle is the retire poor. Even after one retires, he or she has to look for a job as they do not have enough money for living. These are the stages of the “Poor Cycle” that makes a person to work until they die.
Can the student loan problems be solved? Dismissing those who need help is the biggest offender. For example, Choi Na-hye’s parents earn 8,000,000 won a month, but they spend a minimum of 3,000,000 won for their grandmother’s hospital fees and health problems. After rehabilitation fees and the repayment of their house rental loan, there is not enough money left for the four family members to live well. The student works at a part-time job for over 30 hours a week, but she still cannot afford her tuition. The aid for students who have already borrowed money from nonmonetary institutions is insufficient.
In this current student loan system, the student loan is a heavy burden to students, but there are reasons why student needs to borrow money. The most fundamental reason is the high tuition fees. Tuition fees from universities rank the second among OECD countries, with the average fee about 6.7 million won and the highest fee is 8.58 million won in 2012. The tuition fees of universities are high because the university depends on student tuition fees rather than donations and margins from university businesses. According to Dongguk University’s budget, the university depended on tuition fees by 78.5% in 2012. Other universities which are located in Seoul on average depend on tuition fees by 72.8%. This high dependency causes universities to raise the tuition fees as easiest way to fill their budgetary needs.
The second biggest reason why students borrow money is because students cannot pay for their tuition fees with only their part-time jobs. The lowest salary in Korea is 4,860 won for an hour and the average salary is 5,500 won. If students work eight hours per three days a week, with an average part-time salary, they can earn up to 528 000 won a month. In addition if they work eight hours per five days a week on vacation, the total amount of money is about 3.7 million won. Because the average semester costs 3.3 million won and students also have to spend money for living students’ financial situations are extremely tight. Loans become necessary for support.
Finally university scholarships are not enough to cover tuition fees. In the case of Dongguk University, the percentage of students who receive scholarships was 60.4% and the average amount was 1.6 million won. The average percentage of students who receive scholarships in the university was 60% and the amount was 1.5 million won in 2012 according to ‘www.academyinfo.go.kr’. The amount of scholarships is not enough to pay for tuition fees, but also the percentage of recipients has boomed by the university to attract more students. Some universities give small amounts of money for scholarships to raise the percentage of recipients.
In conclusion, students cannot earn enough money to pay for their tuition so students need to use student loans. Therefore, student loans which are given by the government should be changed for its original purpose. According to a research paper which was written by the Korea Institute of Finance, incentives for early repayment and deductions for repayments for education fees can be one way to help students. In this paper, incentives for early repayments can encourage students to pay back their loans earlier with low interest so that the students can save money and the government can make money cycle more quickly so that both students and the government can benefit. Also, student loans are basically used for tuition fees so it makes sense to treat them as part of education bills, so giving students deductions can lower their burden.
South Korea has the most students who attend university and also is in the top two when it comes to high tuition fees. Because of these high tuition fees, many students spend more time working at part-time jobs rather than studying and some become delinquent borrowers. To solve this phenomenon, the government has made KOSAF and the student loan system which have been used since 2009. However, student loans cannot save students and sometimes even puts their future child’s future in jeopardy. For a better education system, and for a better educational environment, government needs to improve the student loan system for students today.
Kim Du-hyeon, Ro Chang-hun firstname.lastname@example.org, email@example.com
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