• Kale

Borrowing: Student Debt is F*cking the World

A look at the student debt problem outside of the United States.

We know that the United States has a $1.7 trillion dollar student debt problem.


This occurrence was propagated by a cultural normative directing the masses to Universities at any cost. Compounding the situation, the US Federal Government appears willing to lend, mostly at high fixed rates, to 18-year-olds regardless of the feasibility of repayment based on likely employment tracts. Ironically, these same individuals, as taxpayers, bear the ultimate burden for defaults (through inevitable increases in taxes) of their peers as the federally-backed loans maintain strict terms restricting forgiveness in bankruptcy.


Ok, so that is a mess.


But what is the situation like abroad? And, most importantly, how is the issue being combated and/or resolved elsewhere?


Let us have a look at Canada, the UK, and Germany.

Canada


In 2017, Canada Student Loans (CSL) was managing an $18 billion loan portfolio. Student loans in Canada have a maximum duration of 9.5 years.


Dramatically less than in the United States but, according to a student debt study, has presented a major issue.


Unlike within the United States, you can have student loans forgiven in bankruptcy in Canada.


In 2017, 1 in 6 (approx 18%) insolvencies in Ontario were due to student debt.


These students are relying on terms of the Bankruptcy & Insolvency Act:

If you have been “out of school” for more than seven years (often called the seven-year rule) your student loans can be automatically included in a bankruptcy or consumer proposal.

Many critics in Canada argue that the 7-year waiting period (a gift in the minds of Americans) should be eliminated entirely and certain hardships provisions exist to allow for the period to be cut closer to 5 years.


In summation, the problem is very real in Canada, however, it appears far more bearable than the situation in the United States in 2020.


United Kingdom


Student debt outstanding in the UK sits at approximately 121 billion pounds.


Based on a savingforcollege study, the average UK student loan debtor had twice the total amount borrowed compared with Americans.


Interest rates are set at the rate of inflation while the borrowers are in school and remain as such if individuals make less than a certain income threshold.


Beyond those parameters, student loan interest rates alter to 9%.


This is comparable to the rate on Parent Plus loans in the US (8.5%).


In contrast to the United States, UK student debt is automatically forgiven if not fully repaid over a 30-year period.


Not really a blessing, but at least there is a definite end to the struggle.


Loan payments also cease during periods of unemployment for the borrowers.


It appears that student debt that was taken out prior to 2004 (so 15 years prior) can be included in a bankruptcy, however, if a borrower earns above a certain income threshold and attempts to not repay the debt - the government has the capability to pull payments directly from their paycheck.


In summation, the UK system strongly parallels the United States. The only apparent exception is the built-in forgiveness after 30-years of attempted repayment and the structure of interest charges on outstanding debt (hard to say that their structure is "better", it's still an insanely high rate).


Germany


Far different culturally than the prior two nations and the United States,


This extends directly into the construct of the German higher education system.


The vast difference can be recognized in the fact that charging tuition for universities was illegal for a substantial period of time (up to the 1970s) and is only apparent today in a handful of private institutions.


Vast public and private scholarship efforts are available for German students and payback programs occasionally structured to be 8-9% of the borrowers obtained salary for up to 10 years post-graduation.


Additionally, any student debt that is incurred by borrowers in Germany carries a 0% interest rate and can be partially forgiven based on academic achievement (finishing top 5/10% of the class, for example) or for finishing ahead of schedule.


This is a truly outstanding system compared with the United States system.


In summation, this is certainly a system that is built for the benefit of students rather than as an exploitative money machine.


Part 2 of this series will take a look at Japan, China, and Korea.

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