Student loan terms should become better the harder you study

April 19, 2021
by Noriyuki Morimoto

Since students usually lack income and therefore the ability to pay off debt, lending them money would basically go against the principle of finance. But students are expected to take a job and advance their careers after completing their studies, so it is possible to finance them, assuming that their future income would become the source of repayment.

Suppose you are designing a student loan to finance a student’s tuition and living expenses. During the period of study, debt gradually builds up while interest payments are exempt. The total of principal and interests accumulate until graduation, and after the debtor gets a job and starts earning income, the lender will be reimbursed with principal and interest equal repayment based on a predetermined schedule.

For this kind of student loan, the student’s career success is crucial. According to the nature of finance, the conditions of the loan should be designed so that the more the student succeeds in society, the more both debtor and creditor (e.g. banks) benefit.

In other words, the benefit of the debtor must also be the benefit of the lender, and the loss of the debtor must also be the loss of the lender. It is necessary to design an incentive for the debtor to act in the direction of the lender’s interest.

Frankly speaking, it cannot be denied that students who graduate from better universities with better grades tend to earn higher income after graduation. This means that from the creditor’s point of view, a student who graduates from a first-class university with excellent grades is a debtor who can be given preferential treatment under favorable conditions.

The harder you study and the better grades you get, the better your employment will be and the better your student loan terms will be. This is not only about the essence of finance, but also about the essence of education as an industry.

 

[Category /FinTech]