With the school year now back in full swing, one of the things you’ve undoubtedly heard, and will continue to hear, is the question of student debt, and how it has become “out of control”. And in that spirit, I wanted to relay a little anecdote.
A few months ago, as part of a student loans-related project that I was working on in a Southeast-Asian country, I led a session for government and bank officials looking at possible loan parameters, and their potential cost implications. One of the parameters, obviously, was the repayment period of the loan. In most of my sample models, I had assumed that the period would look something like Canada’s – about 10 years. But in most of the models the participants developed, the period was only 4-6 years.
Shorter repayment periods on student loans are pretty common in Asia – in China, 4-6 years is also the norm. The policy implications of shorter periods are straightforward. If the government is providing interest subsidies, then shorter repayment periods will reduce those subsidies; if not, then shorter repayment periods reduce the total amount of interest paid by students. Either way, the shorter the period, the greater the repayment burden to students, as they must distribute the repayment of a given principal over a shorter period of time.
None of this was an issue for the participants, who just viewed debt as something young people had to repay quickly in order to get on with their lives. When I pointed out that, in some cases, this would mean repayments would take up between a quarter and a third of graduates’ income, there were shrugs. Borrowers were, for the most part, young and unmarried, participants said, they can just live at home and pay it off quickly. What about getting married, I asked? Or buying a car, or a house? Almost unanimously, the reaction was: “pay this one down first, then borrow again if you need to”.
At this point it occurred to me that the entire narrative around student debt in the developed world is based on the notion that post-secondary graduates ought to immediately be able to join the middle-class, with all the consumption privileges that implies. Data suggesting that graduates are putting off purchases because of student debt are treated as prima facie evidence that student loan debt is out of control. In Asia, on the other hand, this might be considered a sign of policy success.
I am not saying the Asian way is right and ours is wrong. I am just saying it’s worth understanding the cultural biases behind our own policies – and occasionally asking ourselves how much we want to pay to keep those biases intact.
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Fascinating. Thank you for that perspective.
Another cultural aspect to consider is the relationship between students and their parents and the relative responsibility for the cost of education therein. In some countries/perspectives, students are independent and fully responsible for their own education. In other countries/perspectives, it is expected that parents fund them. One anecdote lies in family laws with respect to divorce — in many places, like here in Canada, it is common place for the divorce/support orders to include that the parents share the full cost of the post-secondary education proportionate to income. Yet in a Northern European country (I forget which) parent income isn’t even considered when student loan need is calculated. These assumptions about relative family responsibility make things a bit more complicated, but aren’t always made explicit in discourse.
My concern with this, and SouthEast Asian country’s (SEAC) repayment system isn’t so much the delaying of middle class purchasing power, it’s about the ability to pay back student loans. While university graduates tend to be better off in the long-term economically, in the first 2 years post-graduating, landing the first well-paying job can be a real challenge. I’m curious as to how quickly fresh graduates in SEAC get a job and how positively that job affects their loan repayment abilities. If Canadian graduates take 6-12 months to start in their careers while SEAC’s graduates take 1-3 months, then I can see why the SEAC was rather indifferent to 4-6 year repayment.