A growing number of young Koreans are struggling to repay student loans taken out during their college years. According to the National Tax Service, the non-repayment rate for the Income Contingent Loan program last year reached 18.0 percent by headcount, the highest since related statistics began in 2012. The average outstanding balance per person also hit a record 1.41 million won. Early-career workers with insufficient income are increasingly unable to service their debt on time, as living costs including rent and food expenses continue to mount.
The Lee Jae-myung administration launched the New Leap Fund, a bad bank program, last year to help borrowers trapped in long-term debt. The program is based on the principle that debt forgiveness offers vulnerable borrowers with severely diminished repayment capacity a chance to recover, rather than leaving them stigmatized as credit defaulters. Those in their 20s and 30s are considered a demographic for which such policy support is both most needed and most effective.
However, the Korea Student Aid Foundation, which issues student loans to young borrowers in their 20s, has yet to sign an agreement with the New Leap Fund to sell its long-term delinquent debt (loans over seven years old and under 50 million won). "The only remaining areas where the New Leap Fund has not concluded purchase agreements are the Korea Student Aid Foundation and private moneylenders," a financial industry official who requested anonymity told Seoul Economic Daily on the phone Tuesday. The foundation holds approximately 25 billion won in eligible debt, involving around 4,000 borrowers. Because student loans are granted to those enrolled in educational institutions, even borrowers with more than seven years of delinquency are likely to be in their 20s or 30s.
Unlike borrowers who owe private financial institutions, young people with delinquent student loans remain trapped in debt. According to the Financial Services Commission (FSC), the New Leap Fund purchased 7.7 trillion won in delinquent debt from banks, insurers, credit card companies, and private moneylenders between last October and early March this year, freeing 600,000 people from collection efforts. But young borrowers have been excluded from these benefits due to the delayed sale agreement with the Korea Student Aid Foundation. Student loans delinquent for more than 90 days can be restructured through the Credit Counseling and Recovery Service, but the New Leap Fund offers a maximum principal reduction rate of 80 percent, 10 percentage points higher than alternatives.
The Korea Student Aid Foundation explained that its participation has been delayed solely due to the lack of a legal basis. In 2014, when the National Happiness Fund was in operation, the Korea Student Aid Foundation Act was amended to allow the sale of student loan debt to the Korea Asset Management Corporation. But because the provision was enacted as a one-year temporary measure, no legal basis currently exists.
Industry observers question whether the government has shown sufficient determination to push the policy forward. The New Leap Fund was a key policy initiative announced just two weeks after the new administration's launch in June last year. Nearly a year has passed, yet an amendment bill has not even been proposed. The Korea Student Aid Foundation said it was "communicating with the National Assembly to pursue the measure as lawmaker-sponsored legislation," but with local elections in June and the second-half restructuring of the National Assembly in July approaching, many variables remain before the bill can be passed. The FSC's plan to complete the purchase of long-term delinquent debt by October this year is likely to be delayed as well.
Financial industry players are criticizing the foundation for its passive stance while private financiers are being pushed to embrace inclusive finance. Banks, savings banks, and credit card companies across all financial sectors contributed a combined 440 billion won to launch the New Leap Fund and are selling long-term delinquent debt at around 5 percent of face value. Notably, the previous day, credit card companies took immediate action to sell their debt after it emerged as an issue that Sangroksu, a private bad bank established during the 2003 credit card crisis, would not participate in the New Leap Fund.
Financial authorities are continuing to urge participation from the private moneylending industry, where participation rates are relatively low. "For private moneylenders, this is a matter of survival, yet we are accepting it out of sympathy for the purpose of inclusive finance," a private moneylending industry official said. "Before pressuring private financial firms, shouldn't the public sector lead by example?"
