Main Loan Programs

Income Contingent Loan

For undergraduate students of all grades from low-income households in the 1st through 7th income bracket levels; also, for students (irrespective of income level) from households with three or more children—beginning with the third child. Strong academic performance is part of the eligibility criteria. Loans are not subject to credit approval. Loan applicants must be enrolled for undergraduate study in a postsecondary institution in Korea. Students do not qualify for this loan program if they are in a graduate school, a continuing education program through an academic credit bank system, or a school outside of Korea. Loan must be used for tuition, qualifying school fees, and other specific education-related costs, including living expenses during study. Loan payments may not exceed the student’s financial need; there is no other upper limit on the amount borrowed (loan program permits full coverage of tuition and expenses). In the case of applying loan towards both tuition/school fees and in-study living expenses, the lower limit is KRW 600,000 (at least KRW 100,000 for tuition/school fees plus at least KRW 500,000 for living expenses). Under the income contingent repayment system, a borrower does not have to pay the loan principal amount or interest until he or she has income above a certain minimum threshold level for repayment. Once the borrower’s annual income is greater than the repayment minimum threshold level, the borrower is under obligation to begin repayment.

United States

United States

In the United States, there are two types of student loans: federal loans sponsored by the federal government and private student loans,^[4][5] which broadly includes state-affiliatednonprofits and institutional loans provided by schools.^[6] The overwhelming majority of student loans are federal loans. ^[4] Federal loans can be "subsidized" or "unsubsidized." Interest does not accrue on subsidized loans while the students are in school. Student loans may be offered as part of a total financial aid package that may also include grants,

scholarships, and/or work study opportunities.

Prior to 2010, federal loans were also divided into direct loans (which are originated and funded by the federal government) and guaranteed loans, originated and held by private lenders but guaranteed by the government. The guaranteed lending program was eliminated in 2010 because of a widespread perception that the government guarantees boosted student lending companies' profits but did not benefit students by reducing student loan costs.^[4][7]

Federal student loans are less expensive than private student loans. However, the federal student lending program still generates billions of dollars in profit for the government each year, because the interest payments exceed the government's own borrowing costs, loan losses, and administrative costs. Losses on student loans are extremely low, even when students default, in part because these loans cannot be discharged in bankruptcy unless repaying the loan would create an "undue hardship" for the student borrower and his or her dependents.^[4][8] In 2005, the bankruptcy laws were changed so that private educational loans also could not be readily discharged. Supporters of this change claimed that it would reduce student loan interest rates; critics said it would increase the lenders' profit.

Income-Based Repayment

The Income-Based Repayment (IBR) plan is an alternative to paying back federal student loans, which allows the borrowers to pay back loans based on how much they make, and not based how much money is actually owed.^[9] Income-based repayment is a federal program and is not available for private loans.^[10]

IBR plans generally cap loan payments at 10 percent of the student borrower's income. Deferred interest accrues, and the balance owed grows. However, after a certain number of years, the balance of the loan is forgiven. This period is 10 years if the student borrower works in the public sector (government or a nonprofit) and 25 years if the student works at a for-profit. Debt forgiveness is treated as taxable income, but can be excluded as taxable under certain circumstances, like bankruptcy and insolvency.^[11]

Scholars have criticized IBR plans on the grounds that they create moral hazard and suffer from adverse selection. That is, IBR may encourage student borrowers who could have obtained high-wage jobs to take low wage jobs with good benefits and minimal work hours to reduce their loan payments, thereby driving up the cost of the IBR program. And, if IBR programs are optional, only students who expect to have low wages will opt into the program. Historically, a number of IBR programs have collapsed because of these problems.^[4][12]