South Korea is lending record amounts to students and allowing them more scope to delay repayments than in the U.S., risking an explosion in unpaid debts as growth in Asia’s fourth-largest economy slows.
State-owned Korea Student Aid Foundation boosted bond sales to fund loans by 76 percent from a year earlier in the first half, as outstanding student debt in the nation climbed to an unprecedented 12.3 trillion won ($10.5 billion). American students need to start repaying right after graduation, whereas those in Korea can wait until incomes reach a certain level, according to the Korea Institute of Finance.
While the outstanding loan amount is dwarfed by the $1.2 trillion in the U.S., the increasing number of graduates taking the option to defer repayment because of low incomes means the pile will grow more rapidly, along with the risk of defaults. More than 30 percent of graduates hadn’t started payments at the end of 2014, and that number will probably rise as youth unemployment climbs to a 15-year high and exports and retail sales drop.
“Korea’s student loan program is much looser than that of the U.S.” in that it lets graduates defer payments, said Kang Jong Man, a senior research fellow at the Korea Institute of Finance in Seoul. “This may pose a significant risk going forward, increasing financial burden on the government.”
Korea introduced its loan program for undergraduate students in 2010 to expand opportunities for students to get higher eduction. Before that, the government offered guarantees on debt extended by banks.
The funds bolster spending in a country that already pays big money on education. Expenditures on private tuition in South Korea were the highest as a proportion of gross domestic product among countries in the Organization for Economic Co-operation and Development in 2011, according to the OECD’s latest data.
The rate of university enrollment increased to 68.2 percent last year from 52.5 percent in 2000 and 11.4 percent in 1980, according to the Ministry of Education.
Because the student loans don’t have fixed due dates, there’s a risk repayments won’t be made in time for KSAF to pay back its bonds. The foundation’s total debt was 10.8 trillion won, more than 14 times higher than its equity at the end of 2014.
“Bad debt may increase given the tough job market,” said Cho Jeong Sam, an analyst in Seoul at Korea Investors Service Inc., a local affiliate of Moody’s Investors Service. “Having said that, the growing outstanding loans are unlikely to affect KSAF’s creditworthiness considering that possible losses will be covered by the government through taxes.”
Young Koreans have been hit especially hard by the economy’s slump.
The jobless rate for workers aged 15 to 29 was 10.2 percent in June after touching 11 percent earlier this year, the highest since 1999. That compared with 3.9 percent for the overall population. Korea plans to introduce tax breaks for companies adding full-time jobs for young people, the government said in a July 27 statement on package of measures to boost youth employment.
President Park Geun Hye called on companies to help create more jobs for youth, in a televised speech on Thursday.
Borrowers need to start repaying loans if their annual income exceeds 10.53 million won as of 2015.
Korea’s economic growth slowed to 0.3 percent in the second quarter as the outbreak of Middle East Respiratory Syndrome weighed on consumer spending in a nation that’s already struggling with weak sentiment and an export slump, Bank of Korea data last month showed.
“The increase in unemployed college graduates has become a social issue amid weakened domestic demand coupled with a continued slowdown in construction, shipbuilding and shipping,” Korea Ratings Corp. analyst Lee Sun Young wrote in a June 30 report. “This may lead to an increase in delinquency rate for student loans, resulting in KSAF’s loss.”