The student debt dilemma

The number of university students relying on loan sharks is skyrocketing. Naturally, many default on the loans due to prohibitively high interest rates, the Financial Supervisory Service’s analysis into 40 large private lenders showed. According to the report, 47,945 students had used the high interest lenders as of late June, up 57 percent from the same period last year. The total amount of loans was 79.5 billion won ($75 million), an increase of 40 percent.

The report also showed that 11.8 billion won was registered as overdue, up by 77 percent from that of a year ago. The default rate of student borrowers went up to 14.9 percent from 11.8 percent a year ago, and that is two times higher than default rates of other borrowers using the same companies.

The delinquent borrowers are registered as credit defaulters at credit rating agencies. According to the National Assembly’s audit on the Ministry of Strategy and Finance last year, the number of college student defaulters is skyrocketing. It went from 3,785 in 2007 to 10,250 in 2008, 22,142 in 2009 and 26,000 last year.

The Financial Supervisory Service, therefore, sent notices to private lenders, asking them to refrain from making loans to students. In addition, the service said it will sternly punish any illegal attempts by the lenders to collect debts from parents and siblings, who were not guarantors of the student borrowers.

It appears that expensive tuition was the main reason for the student borrowers’ use of private lenders. Student loans have jumped from 25.15 billion won to 33.68 billion won over the past year - up 34 percent. But it is unclear exactly how much of the money was spent on tuition, because the sum is just a total of the loans marked as student loans on paper.

Some student loan users were reportedly borrowing the money to pay off other debts. Students living beyond their means was also criticized as another reason.

Although university student debt is a problem in our society, it is difficult to find a clear-cut solution. Expanding employment could be an eventual solution, as students pay off their education debts upon landing a job.

At the same time, university students are adults who should be responsible for their own financial transactions. It appears that many of them fail to understand the importance of managing their credit. They must understand that borrowing and spending money irresponsibly without a clear plan to repay it will only turn them into financial pariahs.