General comparisons of six loans schemes in korea

The six student loans programmes are administered through public institutions. Even where the private sector is responsible for lending, the government acts as a guarantor on loans or subsidizes the loan. Public intervention stems from a failure on the part of private markets to supply credit for unsecured loans. Sometimes, public intervention has led to the creation of autonomous public lending bodies like the KRF. These institutions have often been labelled ‘revolving funds’ which are expected to finance themselves through repayments from earlier loans. But in this case, loans are generally heavily subsidized and result in losses. The advantage of this type of lending institution is that it allows stronger control over targeting policies.

The most common administrative arrangement is the use of commercial banks. Some manage programmes entirely, with or without government guarantees, while others act simply as collection agents. The administrative efficiency of these institutions tends to be better than the autonomous bodies.

There are three major motivations for relying on commercial banks. First, the government does not have to make initial capital outlays; second, the government may harness the efficiencies of the private sector and reduce the costs of a loans programme; third, the government does not have to set up a costly administrative apparatus to handle the programme. But, the government does not guarantee for the possible loss by a high default rate, though government intervention in these instances is usually in the form of a partial or full guarantee on loans. As the student repayments are relatively insignificant, total support in a given year is determined by government allocations.

In the Republic of Korea, most of the loans programmes offer students credit in the form of a ‘mortgage’ loan. In this traditional mortgage-type loan, repayment is made over a specific period, usually with fixed monthly payments; interest rates and the maximum length of repayment are used to calculate the fixed periodic payments.

Education is a particularly long-term investment, and risks are high because few students have acceptable collateral and graduates may be unable to repay loans if they are ill or unemployed. The risk is greatest forstudents from poorer backgrounds; future job and earnings opportunities may be less favourable for the poor, and fixed future repayments commit the debtor to repay an open-ended proportion of his/her income. In addition, the poor tend to be more risk averse. And the administrative costs of collection tend to be high because graduates are mobile. Many commercial banks are simply too small to absorb these high risks and costs without charging prohibitive interest rates.

The Korean Government provides student loans at national level.

This means that there are no restrictions on location or type ofeducational institutions that recipients belong to. The main target group of the MOE&HRD scheme and the KRF scheme is the poor, and the other schemes have their own specific target group. But the main objectives of all the schemes are social in the sense that they aim to increase the opportunity of higher education. All schemes except for the KRF programme use commercial banks in funding and administering the
programme. Most schemes require a guarantor for loans. The loan coverage is different, and the MOE&HRD and GEPC provide about 86 per cent of the whole. Mostly, the loan covers tuition and registration fees except for living expenses. Interest rates are slightly different by scheme, and the highest is the MOE&HRD scheme.