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STUDENT LOAN REPAYMENT REGIMES

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S

TUDENT

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OAN

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EPAYMENT

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EGIMES

Student loans are those financial resources that gov-ernments (or public institutions) provide to students for their higher education and which have been ear-marked for repayment. In principle, there are two major models on how students can repay their debt incurred through student loans. The first is the in-come-contingent loan repayment (ICLR), the sec-ond is the so-called mortgage style loan repayment (MSLR). In practice, systems can have characteris-tics of both models.

Income-contingent loan repayment schemes retrieve incurred debt through a percentage of a student’s fu-ture earnings (i.e. the actual earnings of a graduate), often once the graduate’s income has passed a cer-tain threshold. The rate of repayment can be raised incrementally as earned income rises. For the bor-rower and lender it is uncertain when a loan will be fully repaid. The borrower, however, can be more confident that financial capacity is in place when re-payments start and the repayment is adjusted (up and down) to changes in financial capacity.

Mortgage-type student loans have two distinctive fea-tures: the payment period is fixed for a certain num-ber of years and the instalments that students have to pay are assessed beforehand, held stable and are based on the actual debt that is incurred.

Australia, New Zealand and the United Kingdom use an income-contingent loan repayment model. The features are very similar: loans are inflation indexed, repayment starts at a certain threshold, and the re-payment is collected through the tax authorities but managed by the specific organisation that adminis-ters the students loans. If the income rises above the threshold, repayment is compulsory using a specific repayment rate. These rates and the threshold to which they are applied are, however, different. The United Kingdom uses a very straightforward system: one repayment rate (9 percent on income above the threshold) once one specific threshold amount (GBP 15,000 p.a.) is surpassed. Australia uses a more refined system, where tariffs vary between 4 percent and 8 per-cent of income depending on the income level. New

Zealand’s repayment rate is 10 percent on income

above the threshold of NZD 16,588 (Table).1

In the remaining countries, all repayment schemes follow more or less the traditional mortgage struc-ture. Debts are paid back over a certain fixed amount of time. Monthly instalments are also fixed. The Neth-erlands use income-related components. Repayment may be reduced for one year after a means test has been passed.

In either system various important design features can vary: the repayment period, the interest rates that are charged on loans, the management and col-lection of the loan and conditions that apply in case of deferment of or defaulting on the loan. In all countries a period of time is allowed to pass before repayment must begin. The length of this time peri-od is negotiated either between the lender and the borrower or it may be stipulated by the government. The time allowed normally ranges between six months and two years. Time limits for repayment vary between five years for Belgian and Italian graduates and extend up to 25 years in Sweden and the United Kingdom. In some cases the obligation to repay the debt ends when an age limit is reached. Loan repayment in Australia, New Zealand and Canada is in principle not restricted by a time limit.

Interest rates can be set at different levels, varying from zero percent to an inflation-index rate and mar-ket-based interest rates. In practice, a zero percent rate is an exception (Italy). Inflation-indexed rates are found in the United Kingdom, Australia and to some degree in New Zealand. Some countries tie the interest of student loans to that of government bonds. In general the interest rates are below those of the common market interest rates for private loans. The period over which interest rates are charged can dif-fer as well. Loans can be burdened with interest im-mediately after being initiated. Interest rates can be charged upon the conclusion of study. Or the rates apply when the actual repayment starts.

Governments can manage and collect the student loans through different organisations and mecha-nisms. Managing loans basically has to do with admin-istering repayment, setting up payment schedules and determining conditions for deferment or defaulting.

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keep track of income levels, which is why tax authori-ties are often responsible for assessing income, the re-lated amount of repayment and the actual collection of the money. The student loan company is responsible for providing loans. In the case of MSLR a student loan company can be responsible for both manage-ment and collection of repaymanage-ment. This company can either be a public agency or a private organisation con-tracted for this purpose by the government. In these systems management and collection are often com-bined.

If payment difficulties arise, a variety of solutions are implemented. In Great Britain, Australia and New Zealand the direct debiting is automatically stopped or reduced if the income falls below the income threshold. In Sweden it is possible to apply for a re-duction of the loan depending on income and the age of the applicant. In The Netherlands payment can be interrupted for up to a year depending on the in-come. When financial difficulties arise, the Canadian government will pay the interest payments for the debtor. In Canada it is also possible for the repay-ment rate to be reduced for up to 15 years.

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R ep ay m en t of pu bl ic s tu d ent lo an s R e p a y m e n t (i n re la ti o n to in co m e ) R e p a y m e n t p e ri o d In te re st ra te R a te Co n d itio n s S ta rt D u ra tio n L e v e l T im in g M a na g e me nt of re p aym en t Re m a rk s In co m e -c o n ti n g e n t l o a n re p a y m e n t s ch e m e s (ICL R ) 4% -8 % o f HR I a) de -pe nding on in co m e In co m e m u st ex ceed AUD 36, 1 85 p .a. W h en i n co me th re sh o ld i s re a ch e d . N o lim it . Inde x e d by C o n -su me r P ri ce In d ex A D , u n til fu ll r e -p aym en t A u stra li a n Ta x Of fi ce d 10% o f in co m e ab ove th re shol d Th e t h re sh -old i s N Z D 16, 5 88 p .a. W h en i n co me th re sh o ld i s re a ch e d . N o lim it . 7% p .a. ( 1 .5 % in te re st a d ju st -m e n t r a te , pe g g ed to i n fl at io n , 5. 5% b a se i n te re st ra te ). n .a. I n la n d R eve n u e do m 9% o f i n -co m e ab ove th re shol d In co m e m u st ex ceed GB P 15, 0 00 p.a . In Ma y a ft e r fin is h -in g o r l eav in g co u rs e ; w h en i n co me th re sh -o ld i s re a ched M ax. 25 year s. T h e gov e rn me nt w il l w rit e of f a n y par t of th e l o a n th a t is le ft unpa id 2 5 y e a rs af te r l e avi n g t h e co u rse . Inde x e d by in fl a -tio n ra te . A D I n la nd R e v e nue If t h e inc o m e f a lls bel o w t h e thr es h o ld of G B P 15, 000, t h e d e b to r w il l n o t h ave t o m a k e a n y p a y m e n ts u n ti l th e i n co m e ri se s a b o v e i t. M o rt gage-ty p e s tu d e n t l o a n s ( M S L R ) – – 1 Ap ri l o f year af te r fi n is h in g or le a v in g co u rse . F ive yea rs . 4% p .a. ( 1 2% as lo n g as t h e re i s a d e fa u lt o f re p a y -men t) . AR G o ver n m en t o f W a ll oon – O n e year af te r th e en d o f the y e ar i n wh ic h th e stu d e n t gr a d u a te s o r leav es co u rse . M ax. 15 year s. 4 % p .a .dur in g co u rse o f stu d y ; a fte r fin is h in g : dis coun t r a te o f th e Da ni sh C e nt ra l B a nk plus 1 p e r-ce n t poi n t. AD St a te n s Ud dan-n e ls e sstø tt e (p u b li c agen cy) – A t l e as t o n e ye ar a fte r th e b o rr o we r gr a d u a te s o r leav es sc hool o r uni v e rs it y . Twic e th e tu itio n ti m e . 5% p .a. n .a. P ri vat e b a n k s G u a ra n teed b y g o v e rn m e n t. – n .a. F ive yea rs . 0% n .a. n .a. 60% o f th e am o u n t i s a gr a n t an d 4 0 % i s t o re p ay.

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(T ab le c ont in ued 1) R e p a y m e n t (i n re la ti o n to in co m e ) R e p a y m e n t p e ri o d In te re st ra te R a te Co n d itio n s S ta rt D u ra tio n L e v e l T im in g M a na g e me nt of re p aym en t Re m a rk s N e th e rl a nds E U R 45 p e r mont h – Tw o y e a rs a fte r fin is h in g th e c o u rse of s tud y . M ax. 15 year s. Du tc h g o v e rn me nt bonds b a se d r a te (2 0 04: 3. 35% ). ID I n fo rm a tie B e he er Gr o e p (I n d ep en d e nt Pu b lic A g e n cy ) Wh e n a g ra d u a te h a s p ro b le m s re p a y in g th e ir d e bt , the y ca n as k f o r an an n u al me a n s t e st . T h is may r e d u ce t h ei r re p aym en t o b li gat io n s ( e v e n t o ze ro ) fo r o n e y e a r. A ll d e b t th a t re m a in s a fte r th e 15-year r e p aym en t p e ri o d is can cel le d . P o la n d – – O n e year af te r g ra d ua ti on , ho w e v e r, n o t l a te r th a n o n O c to be r 1 o f the yea r f o ll o w in g t h e yea r i n w h ic h t h e st ud e n t i s s uppos e d to g ra d u a te i n a c co r-d a n ce w it h t h e sc h e dul e . Twic e th e tu itio n ti m e . 3. 25% p .a. n .a. P ri vat e b a n k s. G u ar a n teed b y g o v e rn m e n t. S w e d e n – – S ix m o n th s af te r stu d e n t l a st re ce iv e d any f o rm o f s tu d y as si st an ce. 25 yea rs o r u n ti l th e age o f 60. 3. 1% p .a. A D CS N ( S we d is h Nat io n al B o ar d of St u d ent A id) It i s pos si bl e t o a ppl y f o r a re d u c ti on o f th e a nnua l a m oun t to 5 pe rc e n t o f i n co m e . A s o f th e age o f 50 th e a n n u a l am o u n t can b e r e d u ced t o 7 p e rc e n t o f in co m e . Sw it ze rl an d (Ba se l) – – D e p e nde n t on indi -vi d u a l r e p aym en t sc h e dul e . M a x. 12 year s. 4. 5% p .a. AS Dep ar tm en t of E d uc a ti o n. M in im u m year ly r e p aym en t r a te i s 1/ 1 2 o f th e lo a n am o u n t, b u t m in . C HF 2, 400. Ca n a d a (O n ta ri o ) – – S ix m o n th s af te r stu d e n t c o m p le te s st ud ie s or st ops b e in g a stu d e n t. n.a . V a ri ab le . A S N a ti o n a l St u-de n ts L o a n s Se rv ic e o r pr iv a te b a nks . If th er e ar e r e p aym en t d if fi cu lt ies : A r evi si o n o f te rm s ca n e x te n d th e r e p a y m e n t p e ri o d fo r u p to 15 yea rs , t h er e b y lo w e ri n g t h e m o n th ly p a y-men ts . T h e re a re fu rth e r p o ssi b il iti e s i n c a se s o f l o w in co m e : i n te re st r e li ef ( th e g o ver n m en t p a y s t h e in te re st ) a n d “D eb t R e d u c ti o n in R e p aym en t” -p ro g ra m m e s by t h e go v e rn me nt o f On ta ri o an d th e gov er nme n t of C a nad a . If a d e b to r d o e s n o t m a k e hi s pa y m e n ts , de bt w ill b e t u rn ed o v er t o a c o ll e c ti o n a g enc y an d t h e de fa ul t w il l b e r e por te d t o a cr e d it bur e a u ; a s a re su lt , th e a b il it y to o b ta in cr ed it may b e i m -pa ir e d .

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ued 2) R e p a y m e n t (i n re la ti o n to in co m e ) R e p a y m e n t p e ri o d In te re st ra te R a te Co n d itio n s S ta rt D u ra tio n L e v e l T im in g M a na g e me nt of re p aym en t Re m a rk s – – Fe d e ra l Pe rk in s L o an: N in e mo nt hs af te r gr ad u a ti o n . U p to te n yea rs . 5% p .a. n .a. U n iv er si ti es . F o r s e v e ra l re a so n s th e re a re p o ss ib il it ie s fo r d e fe rm e n t a n d fo rb e a ra n ce o f th e re p a y m e n t. D u ri n g f o rb e a ra n ce , th e pa y m e n ts a re pos tpone d o r r e d u ce d, or t h e r e pay me nt pe ri o d mi ght be ext en d e d . I n te re st co n ti n u e s t o ac cr u e , h o w eve r, a n d th e d e b to r i s re sp o n si b le fo r p a y in g it. Fu rt h e r MS L R a v a il a b le . ft e r l o a n d is b u rse m e n t. – A R : a t s ta rt o f re p a y m e n t. – A S : a fte r fi n is h in g stu d ie s. a b le i n co m e p lu s a n y n e t re n ta l l o ss e s, to ta l re p o rta b le fri n g e b e n e fits a n d e x e m p t fo re ig n e m p lo y m e n t i n co m e . st ra li a n G o v e rn m e n t, A u st ra li a n T a x a ti on O ff ic e ( h tt p :/ /a to. g o v .a u /y ou th /) , 2 1 A p ri l2 0 0 5 ; A u st ra li a n G o v e rn m e n t, D e p a rt me nt of E d uc a tio n, Sc ie nc e a n d T ra in in g .g o in g touni .g ov .a u/ M a in /F e e sL o a n sA ndS ch ol a rs h ips /U n de rg ra dua te /L o a n s/ H E C S H E L P .h tm ), 2 1 A p ri l 2 0 0 5 ; B a nk P e ka o S .A ., (w w w .p e k a o .c o m .p l/indy w idu a lni 1 1 .x m l? / 013 1 -861184-93442 ), 21 Ap ri l 200 5 ; C o mm u n a u té fr an çai se d e B e lg iq u e (h tt p :/ /w w w .c fw b .b e/ a ll o ca ti o n s-e tu d e s/ P g004. h tm ), 2 1 A p ri l 20 0 5 ; C S N ( h tt p :/ /w w w .c sn .s e/ en gl is h / de -ri l 2 005; C S N, I n fo rm a ti o n o n S w e d is h S tu d e n t A id , C S N F a k tab la d 20 05; D e p a rt men t fo r E d u ca ti o n a n d S k il ls , A G u id e t o f in a nc ia l s u p p o rt for h ig h e r ed uc a tio n st u de nt s i n ondo n , J a nua ry 2 005; E e st i Ü h is p a n k ( h tt p :/ /w w w .s eb .e e /i n d e x /13 01 ), 22 Ap ri l200 5; I n fo rm a ti e B e h e er G ro e p ( h tt p :/ /w w w .i b -gr o e p .n l/ ), 21 Ap ri l2 00 5; M in is tr y o f S o ci al D e vel o p m e n t d ,S tu d y L in k ( h ttp :/ /w w w .s tu d y li n k .g o v t. n z/ ), 2 1 A p ri l 2 0 0 5 ; O n ta ri o S tu d e n ts A ssi sta n ce P ro g ra m (h tt p :/ /o sa p .g o v .o n .c a /e n g /n o t_s ec u re /r e p a y. h tm ), 22 Ap ri l 2 0 05; tt p:/ /w w w .p o rt a li n o .it/n u k e /m o d u le s. p h p ? n a m e = N e w s& file = a rt ic le & si d = 4 8 2 8 & n e w la ng = ita li a n ), 2 2 A p ril 2 0 0 5 ;R a n d E u ro p e , A B ro a d I n te rn a tio n a l C o mpa ri so n of St u d ent L o an e n C o u n tr ie s, L e id e n 2 003; S ta ten s U d d a n n e ls e sstø tt e (h tt p :/ /ww w. su .d k /i n d e x .h tm l? /i n -e n g li sh /d e fa u lt .h tm l) 2 2 A p ri l 2 0 0 5 ; m e n t o f E d u ca ti o n , T h e S tu d e n t G u id e (h tt p :/ /w w w .s tu de n ta id .e d .g o v /s tu d e n ts /publ ic a ti o n s/ st u d e n t_ g uid e /2 0 0 3 _ 2 0 0 4 /e ng li sh /t y pe s-c a mp us b a se d. ht m) , 2 2 A p ri l 2 0 05 .

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