The Korea Herald


[Editorial] Zero-interest student loans

By Korea Herald

Published : Oct. 23, 2011 - 19:27

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The trade union of Korea Exchange Bank surprised many on Thursday by announcing that it would promote a 1 trillion won interest-free loan program for college students.

The union’s plan calls for KEB to provide 5 million won interest free to a total of 200,000 students over five years starting next year. It also proposes to cover the interest costs of the program, which would total 150 billion won, with contributions from the bank’s 6,500 employees and the bank’s profits.

If implemented as planned, the program would be of much help to students who have to rely on loans to finance their college education. Currently, the Korea Student Aid Foundation provides government-guaranteed loans to students at a fixed interest rate of 4.9 percent per year.

However, it is still unclear whether the program can be implemented as envisioned by the union. In the first place, the union needs to persuade the bank’s management to accept its proposal.

Even if the bank endorses the scheme, and the bank’s employees all agree to chip in to shoulder part of the interest costs, the union will still have to wait for the go-ahead from the financial regulator.

Currently commercial banks do not operate their own student loan programs. Since 2009, all student loans have been arranged by the Korea Student Aid Foundation. Hence it is unclear whether KEB would be allowed to run a student loan program on its own.

From the regulator’s standpoint, the program is risky as it would erode the bank’s profitability. It calls for the bank to shoulder more than 85 percent of the interest, with the remainder covered by the bank’s employees.

Furthermore, the program could produce many credit delinquents as it would extend loans to students from the bottom 70 percent of households, regardless of their academic performance or age. The beneficiaries would be required to pay back the principal over five years beginning one year after graduation.

Thus, the program has many hurdles to clear. It may not get implemented at all. Yet it deserves attention not just because it can provide zero-interest loans to 20,000 students per semester or 40,000 students per year for five years.

The loan scheme comes at a time when financial companies are facing increasing pressure from regulators to mend their practices of paying out hefty dividends and bonuses and behave in a more socially responsible way.

On Thursday, the Financial Supervisory Service said it would draw up measures to stop local banks spending too much of their profits on dividends for shareholders.

On Friday, Kim Seok-dong, chairman of the Financial Services Commission, called on financial firms to reinforce their public roles and carry out their social responsibilities. He emphasized the “richesse oblige” of people in the financial industry, saying they are obliged to give something back to society, since their companies have been repeatedly rescued from crises with taxpayers’ money.

It is still unclear what motivated the KEB union to propose the loan program that requires the sacrifice of its members and the bank. The union claimed it reflected their awareness of the need for banks to contribute to society. But the proposal appears to have more to do with the union’s desperate effort to maintain KEB’s independence. The bank’s current owner, U.S. buyout firm Lone Star Funds, is likely to be forced soon to sell its shares to Hana Financial Group.

Whatever motives lie behind the union’s initiative, we hope the loan program stimulates debate on the social responsibilities of financial companies and inspires other banks to redouble their efforts to help the socially weak.