Student loans to weigh on Korean economy; Growth rate doubles that of household debt; “In 2012, Korean parents shouldered 79.9 percent of their children’stuition. In 2008, they shouldered 94.7 percent”

Updated : 2014-06-02 19:12

Student loans to weigh on economy

Growth rate doubles that of household debt: BOK
By Yoon Ja-young

Media reports in the United States state that student loans arehampering the economic recovery. A report by LG Economic ResearchInstitute said that student loans will also become a major problem inKorea.
The Bank of Korea estimated the country’s education-related loans at28.4 trillion won last year, up 12.3 percent from the previous year. It isdouble the growth rate of the total household debt, which increased bysix percent. 
Students getting loans from the government funded Korea Student AidFoundation (KSAF) grew ten-fold between 2005 and 2012, with 1.8 million students getting loans. They borrowed 11.3 trillion won from thefund in 2012.
The problem is that the default rate is increasing rapidly. The defaultrate at KSAF stood at 5.21 percent as of 2012, while it hovered a littleabove 3 percent from 2006 through 2010. More than 40,000 studentshave failed to pay back loans for over six months as of 2012, while only670 students did so in 2006. These students not only getdisadvantages in financial transactions, but also may have problems inthe job market.
Education related loans take 2.9 percent of the total household debt,which compares with 9.4 percent in the United States. Cho Young-moo,a senior economist at LG Economic Research Institute, however, said itwill soon worsen.
“In 2012, Korean parents shouldered 79.9 percent of their children’stuition. In 2008, they shouldered 94.7 percent,” he said.
He said that student loans are expected to continue expanding asparents fail to support them. “The economic recession and sluggishreal estate market, as well as layoffs are putting more parents intodeteriorated economic conditions.”
He pointed out that 30 percent of those who applied for debtrestructuring last year were in their 50s, the age group likely to havechildren in college.
Moreover, the young are losing their capability to pay back loans amidthe bad job market.
“If the students fail to get job, the loan continues expanding. ” Hepointed out that even if they finally succeed in getting a job, 20 percentof their income that exceeds the minimal income criterion will bededucted to pay back the loans.
“It is likely to decrease the disposable income of the young, as well asdampen their consumer sentiment … It will have long-lasting negativeeffect on the consumption of durable goods such as cars and furnitureon top of the demand for housing,” the researcher said.
Cho said that despite having to depend on the loans, young people arechoosing to get college education due to the increasing income gapbetween those with college diplomas and those without them. Peopleaged between 25 and 29 with college diplomas earned around 2 millionwon more annually than their peers without diplomas in early 2000s ―but the gap expanded to 5.5 million won in 2010.
To lessen the burden, Cho suggested inducing more private financialcompanies to provide better loan programs, so that students don’t haveto borrow money from loan sharks. He said students with potential for agood income should be offered low interest rate, as they do in theUnited States.
He added that the economic burden related with college educationshould be shared between the school, community and country, insteadof making the students shoulder it all. “There should be more taxbenefits for donation to colleges and such donation for the futuregeneration should be highly evaluated.”
Most of all, better job market conditions are crucial. “It is time for tuitionloans get attention or they will add to the household debt problem,”Cho said.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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