Korea's student loan rates, double OECD average

Many times, the relative merit of being lower or higher than some index average is unclear. Take for instance the female employment participation rate. Among OECD nations, Korean women have some of the lowest employment numbers. Is this good or bad? It's unclear, though many would argue that it's a terrible thing; all women must work at equal or higher rates to men. But here, we believe in equal opportunities and freedom of choice, not equal results. To the extent equal opportunities exist, we say, let the chips fall where they may.

But in other areas, like interest rates, lower is better. Of course, pushing it down artificially is never good - it only leads to asset bubbles or inflation. But when the rate is low because people have chosen to save or they are willing to forego current spending for future consumption, then the lower rate is a good sign.

When it comes to student loan rates, specifically, the so-called Income Contingent Loans (ICL) or "study-now-pay-later" loans, Korea's rates appear to be highest among countries running similar programs, according to Yonhap. These student loans are obviously government subsidized and just kicked off in January. Under the program, students can borrow while attending school and then begin paying back their loans after they land steady jobs. Five other OECD nations run similar programs - Britain, Sweden, New Zealand, Australia and the Netherlands.

According to Yonhap, Korea's ICL rate currently stands at 5.7 percent, higher than Korea's base mortgage rate of 5.2 percent and more than double the average of the five OECD member countries during the 2004-2005 period.

More recently, Britain set its rate at 2.6 during the 2004-2005 period and lowered it to 2.5 percent in January 2009 and further to 1.5 percent in March last year, then to zero from September 2009 to August this year. Sweden's ICL rate stood at 2.8 percent from 2004-2005 and was brought down to 2.1 percent in 2008. The Netherland's ICL rate stood at 2.39 percent.

"The number of borrowers at the end of last month was around 430,000, much less than the expected 1 million," said an official in South Korean People's Solidarity for Participatory Democracy, a Seoul-based civic group, Yonhap said. "The rate needs to be reduced to 2 to 3 percent in order to help ease the burden on students in real terms."

Clearly, ICL rates are government controlled and hardly the stuff of market forces. Still, it seems ironic that under a program that is supposed to encourage education and lessen the burden on students/parents vis-a-vis education costs, Korea's rate stands at more than double the rate of its peers.

But beyond that, there's not much more we can say on the matter, frankly. Maybe Korea's ICL rate is too high and students aren't being given enough of a break. But the program is still new and arguably, government tinkering with interest rates are questionable matters to begin with.