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Student Loans Effect on Graduates’ Borrowing

Student Loans Effect on Graduates’ Borrowing:

A Survey of Bank Managers and Loans Officers

September 2002

Key Findings

The New Zealand University Students’ Association surveyed bank managers and loans officers and found that:

- 95% of total respondents had received applications for loans, mortgages, overdrafts and credit cards from clients with student loans.

- 51% of those who had received applications from clients with student loans had citied student loans as a contributing factor in declining finance and of these respondents, mortgages were the most likely to be declined (34%) and 22% had cited student loans as very important in the decision making process.

- Two banks made it clear that the size of the loan was a factor when considering finance, as opposed to the ability to make repayments, which contradicts the advice of the banking ombudsman.

Background

One in ten New Zealanders now has a student loan and in February this year, total student loan debt reached 5 billion dollars. Ten years into the student loan scheme graduates with student loans continue to grapple with the realities of large debts, high interest rates and lengthy repayment times. This survey accordingly set out to broadly assess the ability of student loan bearers to access finance and to find out which types of finance were most likely to be declined because of student loans.

The 1999 Otago University Students’ Association survey of bank managers and loan officers showed that “around half of the officers had denied people finance because of their student loans, and most of the officers considered that student loans did affect people’s ability to get finance.” Half of the respondents surveyed for the 1999 APSU/NZUSA Student Debt Casebook reported that their debt has “been an issue when seeking additional finance” and 43.67% of respondents to the NZUSA 2001 Teachers Debt Casebook said their debt had been an issue when seeking additional finance. Some also reported that they had been unable to obtain a loan or a mortgage from banks and other credit agencies because of their high debt and low salary. Others did not even bother to seek finance from banks believing they would be refused. It is not surprising that 30% of respondents in a 1998 Ministry of Youth Affairs survey did not disclose their loan commitments when applying for credit.

In her 1996-97 Annual Report, the Banking Ombudsman made it explicit that banks should only concern themselves with repayment obligations, rather than the total size of any student loan (see text box). In the 2000 Auditor-General’s report on the student loan scheme, the following conclusion was reached:

“¡Kstudent debt affects the ability to service, and therefore access, other borrowing.”

“In a couple of cases that I suspect may be forerunners of more, my office has been approached by young people who are established in employment and want to obtain a housing loan but who have been declined (in one case by several banks) because of the amount of student loan still outstanding. In both cases the applicants had more than sufficient disposable income, after meeting student loan repayments, to meet the bank’s loan servicing criteria and were able to offer what would normally be adequate security, but appear to have been declined because the proposed student loan exceeded the value of the proposed property purchase. In neither case did the customer decide to pursue a complaint through my office, so I am only in a position make general remarks on the subject.

A bank's decision on a loan application is normally made in exercise of its commercial judgements and accordingly a complaint about such a decision falls outside the Banking Ombudsman's Terms of Reference. I wonder, however, whether in the cases described above the bank erred administratively in failing to take into account the fact that the customers would not be required to make student loan repayments if their income declined below the point where they could comfortably service the mortgage.”

Banking Ombudsman Annual Report 1996/7

Methodology

This national survey investigated whether student loans are impacting on graduates’ ability to borrow, whether through overdrafts, credit cards, personal loans or mortgages. The simple, four-question survey was sent to 266 bank branches randomly selected from a national database of lending institutions. The response rate was just over 26%, with 68 complete responses.

This survey was not intended to give an in-depth picture of the way in which student loans impacted on lender’s decisions, but rather to test whether student loans were a contributing factor in declining finance, how important they were in such decisions, and what form of borrowing was most likely to be refused because of student loans. There were also opportunities for general comments to be made on each of these questions.

Survey Results

Question 1:

Have you had applications for overdrafts, credit cards, personal loans and mortgages from clients that have a student loan?

Question 2:

Have student loans ever been a contributing factor in declining any of the following types of finance: overdraft, credit card, personal loan, mortgage?

Of the 63 respondents who had applications from student loan borrowers, 51% said that student loans had been a factor in declining financial services. Student loans were most often cited as a contributing factor when considering mortgages (34%) and personal loans (30%).

Comment:

“As time goes on, more and more mortgages will be declined, as student loan debt will push the application outside the criteria”

Question 3:

How important was the student loan in these refusals?

Of the 32 respondents who had cases where they had declined finance for clients with student loan debt, 31% cited student loan debt as both important and moderately important. Only 16% cited it as not important in their considerations. 22% reported that student loans were very important in refusing borrowing.

Comment:

“Student loans are now becoming more important as the burden of servicing student debt in addition to say a mortgage loan has a very real weighting on any approval”

Question Four:

Of the following, which are most likely to be declined because of a student loan: overdrafts, credit cards, personal loans or mortgages?

Of the 29 responses to this question, mortgages were the most likely to be declined because of student loans (42%). 29% responded that student loans could lead to refusing personal loans.

Comments:

“If clients have a range of other debts then student loan payments can become the deciding factor in a decline”

“Student loan holds as much importance as other liabilities and repayments the same as other required outgoings like rent etc”

“We wish to assist a customer but if income is too low it is not a good practice to lend to them, as ability to pay and cost of living for customer would be too hard for them”

“In many respects the whole student loan scheme is having a negative impact on the borrowing potential of graduates”

Discussion: Size of Total Debt vs. Repayment Responsibilities

There are two ways that lenders might allow student loans to influence their assessment of a borrower. Only one is legitimate. Both, however, can impact negatively on the ability for student loan bearers to borrow.

It is legitimate for a lender to take into account the compulsory student loan repayment obligations a person may have. These reduce the disposable income that a student loan debtor has in the same way as any fixed expense like rent or transport, or for that matter, taxes. All other things being equal, a person with a student loan cannot afford the same level of mortgage or hire purchase repayments as someone who does not have one. In some cases, therefore, the lender may determine that the applicant cannot service further obligations.

It should be noted, however, that this is not due to the actual size of the student loan. Repayment obligations are based on income, not indebtedness. Someone with a large student loan would be equally disadvantaged as someone with a small student loan by these considerations.

What is not legitimate is for lenders to take into account the size of a borrowers student loan. While it is standard practice to measure the size of a prospective borrower’s existing debts to ensure that they are not too heavily indebted, a student loan should be excluded from such calculations. This is because it its an “income-contingent-repayment” loan; in other words, you need only ever pay your minimum compulsory requirement as if not fully repaid it is written off upon death. In other words, because a student loan will never be “called in”, the exact size of the debt should be of no consequence to banks or other lenders.

Students’ associations, the Government and the Banking Ombudsman are all in agreement on this point. The actual practice of lenders however, is not always consistent with this, as is evidenced by the comments below, where banks are clearly holding the total size of the debt against their clients.

Comments:

“If their student loan is a small amount it’s not too bad, but once student loan over $10,000 their repayments may not be able to be met”

“When a graduate applies for a loan or mortgage they may have student debt as high as $30,000 plus and this is a burden to them. It is a commitment that we must consider. It also can show that they have a negative equity between assets and liabilities, which can be a mitigating, factor in our decisions”

Implications

Student loans are making it more difficult for graduates to access private finance, and in particular to obtain mortgages so as to buy a house. Compulsory student loan repayments represent a 10% loss of income and make it much harder for people with student loans to save for a deposit on a home. Furthermore, it is worrying that even in this small sample of banks, some are continuing to count the amount of student loan debt as a liability and as such, are unfairly denying graduates the finance they should be entitled to.

NZUSA recommends that graduates stop disclosing the amount of their student loans to banks to reinforce the significance of their repayment obligations rather than the size of the student loan debt. We also recommend that banks adopt written procedures for clients with student loans, and train all staff in the use of these policies so as to avoid any more student loan borrowers being unfairly penalised.

Questionnaire


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