Impact of Student Loans on Finance Raising Ability

Impact of Student Loans on Finance Raising Ability

The Otago University Students' Association

22 November, 1999

Mark Baxter BSc, Campaigns Coordinator

Steve Day, President

With assistance from: Daniel Copeland, General Executive

Abstract

The aim of this study was to investigate reports of people being refused finance because of their student loans, and to investigate the extent if such a problem existed.

Randomly selected bank managers and loan officers were surveyed nationwide. Results showed around half the bank officers have refused finance with student loans as a factor, and most bank officers consider student loans do affect ability to get finance in some way. The extent of the problem appears to affect a small number of people at present, however it was also shown that student loans are making some banks judge loan criteria illegitimately.

It was concluded that student loans do negatively effect the ability of some people to get a mortgage or bank loan.

Introduction

For several years students’ associations have heard anecdotal reports about graduates being refused finance for homes and businesses because of their student loans. Student loans were intended to make user-pays education more accessible. If student loans are having a negative affect on recipients’ ability to raise finance this creates a tertiary education access problem.

The Government has not investigated the impact of student loans on people’s ability to raise finance. Rather, successive officials have denied that such refusals were happening. As recently as September this year the Minister of Tertiary Education, Max Bradford, has said:

“We have seen no hard evidence that students are being denied bank loans, putting off buying houses or delaying starting families as a result of their student loans. If it was considered these effects were occurring and were creating barriers to participation, the Government would take appropriate action.”

Max Bradford

Methodology

- One hundred and fifty survey forms were sent out to bank managers around the country. Random selections were made from all major and minor banks and credit unions in Auckland, Hamilton/Waikato, Wellington, Christchurch, Dunedin, and one randomly selected smaller town in each Island. We aimed to get a mixture of banks in: affluent parts of towns or cities, poor parts of towns or cities, areas with a high student population, and areas with a low student population.

- All respondents were assured anonymity.

Questionnaire

The survey asked the following questions:

- Approximately what percentage of your applicants for mortgages or loans (significant loans e.g. to finance a business, purchase a car, or for a large amount) have student loans?

- Have you ever refused a mortgage or loan because of factors including a student loan? YES/NO

- How much of a factor was the student loan in that refusal? (Please circle a number with 1 being a small factor and 10 being the only factor.)

- Approximately what percentage of your refusals have included a student loan as a factor?

- To what extent are student loans affecting the ability of your clients to get finance? (Please circle a number with 1 being a small extent and 10 being a significant extent.)

After each question respondents were prompted to comment.

Results

- 21.3% (range 0 - 85%) of clients seeking finance now have a student loan of some size.

- 47.2% of bank managers have refused a client a mortgage or loan at some point with student loans playing a factor in that refusal.

- Of those managers who had refused finance because of a student loan, they considered that the student loan played a moderate factor in their refusals. Ranked as a factor out of ten it received a mean ranking of 3.06 (range 1 - 8).

- Of those managers who had refused finance because of a student loan, 2.07% (range 0 - 10%) of refusals included a student loan as a factor. On average all bank managers considered that 8 out of every 1000 refusals they make for financing includes student loans as a factor. If that proportion is then calculated against the proportion of clients with student loans that becomes 39 out of every 1000.

- 83% of bank mangers considered student loans were affecting their clients’ ability to seek finance. This was to a small-to-moderate extent (mean ranking out of ten of 2.33; range 0 - 8).

All responses and results can be found in Appendix 1.

Respondents’ Comments

- Six comments noted that they had never refused a client finance because of a student loan or that student loans were not a factor in allowing or refusing finance.

- Never include student loan in Debt Repayment

- We don't refuse people due to student loans

- Have never refused a loan because of student loan debt

- No declined loans due to student loan

- All approved

- No known cases of recent times

- Sixteen comments noted that student loans were a factor when combined with other types of debt such as overdrafts, HP agreements or previous loans.

- Repayments of loans with other debts has meant the customer could not service the loan

- Repayments of the student loan was small compared to other commitments

- Only because clients wanting to borrow 90% of house value and student loan and other debts well in excess of assets

- Only because student loan was substantial and servicing overall was outside criteria

- Depends on the rest of their circumstances, i.e. other debts, savings, equity to go into home etc.

- Depends on their income & whether they have other debt e.g. Hire Purchase etc

- Servicing all debt - student loan repayments must be taken into account

- Possibly only if a person could not afford repayments on a mortgage because they were also repaying student loan. Very rare through that just as student loan would have this implication

- Annual income to debt servicing ratio is used. If servicing too high - which includes student loan, it can push up percentage too high to get a loan

- Any debts/loans must be allowed for when assessing ability to meet loan repayments as well as other commitments. The type of other borrowings e.g. HP Finance, overdraft, student loan does not have any different bearing

- Only when combined outgoing including loan repayment exceed our product rule

- Student loans are a factor as much as any other outgoing

- Not because they had a student loan as such but because this contributed to their servicing being outside criteria

- New lending would increase Debt servicing beyond bank's criteria

- Due to large debts with no assets at all to show for it. Not just student loan debts. Paying off a car but no car as it had been written off etc.

- Servicing all debt - student loan repayments must be taken into account

- Eleven comments talked about the size of the student loan playing a significant role and its relationship to pre-specified debt servicing criteria or ratios of debts to assets and requested loans.

- One refusal only - large debts including student loan of $37,000

- Annual income to debt servicing ratio is used. If servicing too high - which includes student loan, it can push up percentage too high to get a loan

- Only because of debt servicing. We allow up to 33% for all debt servicing no matter what debt it is. Student loan is a debt

- 30% of debt servicing ratio impacted when at ###. At XXX the debt servicing comes off the income figure. e.g. $35k loan repay say 2800 PA. This figure comes off the income figure then the debt servicing for loan is calculated and other HPs etc.

- Due to servicing of loan requirements

- Debt servicing ability affected and if too high loans declined

- Depending on the amount of debt

- Depending upon the amount of debt and what the minimum repayment quarterly/monthly is

- Only because student loan was substantial and servicing overall was outside criteria

- Annual income to debt servicing ratio is used. If servicing too high - which includes student loan, it can push up percentage too high to get a loan

- Five comments noted that they treated student loans exactly the same as any other kind of debt when assessing people’s eligibility for loan. In some instances this is to be expected because the Lender is looking at the clients ability to service the debt. In other instances the lender may look at the size of the loan (as we have seen from earlier comments - note highlighting).

- Servicing all debt - student loan repayments must be taken into account

- Only because of debt servicing. We allow up to 33% for all debt servicing no matter what debt it is. Student loan is a debt

- Annual income to debt servicing ration is used. If servicing too high - which includes student loan, it can push up percentage too high to get a loan

- Any debts/loans must be allowed for when assessing ability to meet loan repayments as well as other commitments. The type of other borrowings e.g. HP Finance, overdraft, student loan does not have any different bearing

- Student loans are a factor as much as any other outgoing

- Seven comments noted that problems due to student debt were a relatively rare phenomenon and/or not a major factor in their bank.

- In my experience the type of clients seeking mortgage finance, student debt is either largely repaid or their income is high enough to compensate

- Generally only seen smaller loans - 10 - 50k, and are repayable

- Not actively involved in providing loans to other than commercial or industrial investors

- Very small percentage - can only think of 4 over past three years in new lending situations (residential mortgages)

- One refusal only - large debts including student loan of $37,000

- Have very small percentage of customers with student loans - has not been issue because are earning, generally smaller debts and structured over long repayment term

- There are definitely more loans approved than declined where a student loan is involved

- Other comments included:

Mainly home loan applications

I am not sure at the percentage as I have never thought about it

Hard to gauge, don't really find out until they apply for credit

We are at XXX Uni. Branch therefore most lending is to students

Generally clients have little or low deposit because all spare funds are been used repay student loans

You would probably be better to do a survey over a set period in the future rather than looking at historical info. As it is very difficult to recall past applications

Discussion

The response rate of 24% is higher than expected; given that different bank’s loan criteria could be considered commercially sensitive, and that the results may not have necessarily been seen by respondents as positive for the banking industry. The number and ranges of responses show a wide sector of the industry is represented.

A considerable percentage of people seeking finance now have student loans (21.3%). This percentage is likely to grow in the future as increasing numbers of people with student loans enter the workforce and require finance.

A large percentage of bank managers have refused a client a mortgage at some point with student loans playing a factor in that refusal (47.2%). Only three bank officers said expressly they did not consider student loans when calculating lending criteria, so the percentage of refusals in the future could also be higher.

Of the bank officers that had refused finance because of a student loan, they considered student loans played a moderate factor in these refusals (3.06 out of ten). These bank officers considered that these refusals account for 2.07% of their clients.

83% of bank officers considered that student loans did affect their client’s ability to get finance. Bank officers considered student loans were a small-to-moderate factor in this (2.33 out of ten).

As expected, for those officers who had refused finance due to student loans this factor (3.12) is very similar to the factor student loans were considered to play a part in a refusal (3.06). However, it is interesting to note when the data for those officers who had not given refusals due to student loans is added in the factor student loans were considered to affect finance ability (2.33) is higher than the factor student loans have played in refusals (1.43).

While this inconsistency may not seem substantial, it should be noted that bank officers who are more involved with graduates show this inconsistency robustly. Of those who had 50% or more clients with student loans, all but one reported that student loans were more likely to affect ability to get finance than student loans were a factor in their refusals.

This inconsistency possibly suggests that managers see student loans becoming more of a refusal factor than it is. Otherwise it may indicate that student loans have other impacts than merely financial. For example student loans may be having a conscious/subliminal impact upon students’ or graduates’ willingness to seek finance.

From the comments it can be seen that some lenders said they look at the size of the student loan (see earlier highlighting). This is not legitimate according to the government and Banking Ombudsman. The NZUSA 1999 Debt Casebook notes that:

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

Other Considerations:

- Many students/graduates may not even approach a bank to ask for finance because they suspect they may be refused. Thus, these figures are a best case (some may even say inaccurate) picture of the ability of students and graduates to get finance when they have a student loan.

- Student loans are not guaranteed against any asset in the same way that a mortgage or charge is. Thus as soon as they start being treated the same as other debts they suffer from inflexibility in their repayment schedules.

- It should be remembered that the situation will worsen over the next five or six years. As the price of education continues to rise, and the most expensive courses are often those which take longest, such as medicine and dentistry; it is not unusual for health-science students to have debts of up to $100,000. As students with increasingly higher debts graduate, most will probably wait two or three years more while they consider buying homes. As their debt increases this financing problem will get worse.

Conclusion

Mr. Bradford’s comment on the lack of evidence on people being refused mortgages and loans because of student loans, is now out of date. 47% of bank officers have refused finance to about 2% of their clients with student loans as a factor. 83% of all bank officers consider student loans do affect ability to get finance in some way. This clearly demonstrates that student loans do negatively affect the ability of some people to get a mortgage or bank loan. Perhaps then as Mr. Bradford suggests, it is time for the Government to “¡Ktake appropriate action”.

While this problem currently only affects a small number of people, clearly a problem with the calculation of loan criteria has also been identified. Student loans are making some banks judge loan criteria illegitimately. Perhaps applicants for bank loans should only be obliged to disclose their student loan repayment rate rather than their total student loan amount.

No substantial research into the effects of user-pays education has been done by the government. Future research in the area of ability to raise finance should include a survey of a random selection of all people who have left tertiary education since student loans were introduced, so the full extent of the impact on student loan recipients can be measured. Research into the effects of student debt on the community and economy should also be considered.

OUSA wishes to thank the bank officers who shared their knowledge with us. Without their cooperation and expert information we could not have done this study to access the impact of debt upon students.

OTAGO UNIVERSITY STUDENTS’ ASSOCIATION,

PO Box 1436, Dunedin

tel. 03-479-5332

fax. 03-479-5346

cell. 021-345-368

Appendix 1:

RESPONDENTS: 36

Surveys Sent: 150

Return Rate 24% N/A = No Answer given

Questions

Respondents Q 1 Q 2 Q 3 Q 4 Q 5

% of applicants with SL? Have you ever refused a mortgage due to the SL?

0 = NO

1 = YES How much was the SL a factor? Overall percentage of refusals with SL a factor To what extent are loans affecting ability to get finance?

1 4% 0 0 0% 0

2 10% 1 1 2% 3

3 3% 1 2 1% 2

4 90% 0 0 0% 1

5 N/A 1 3 N/A 3

6 25% 1 2 2% 2

7 10% 1 2 1% 6

8 5% 0 0 0% 1

9 10% 1 6 2% 4

10 3% 0 0 0% 1

11 5% 0 0 0% 3

12 20% 0 0 0% 6

13 5% 1 3 10% 3

14 50% 0 0 0% 1

15 20% 0 0 0% 0

16 18% 1 N/A N/A 1

17 30% 0 0 0% 1

18 15% 1 3 0% 1

19 10% 1 3 1% 3

20 1% 0 0 0% 2

21 85% 0 0 0% 5

22 0% 0 0 0% N/A

23 85% 0 0 0% 5

24 20% 0 0 0% 0

25 0% 0 0 0% 0

26 1% 0 0 0% 0

27 1% 0 1 0% 1

28 50% 1 4 3% 2

29 6% 1 5 1% 5

30 60% 0 0 0% 1

31 60% 0 0 0% 1

32 4% 1 2 0% 2

33 5% 1 2 2% 2

34 10% 1 3 1% 5

35 15% 1 0 0% 1

36 10% 1 8 5% 8

MEAN 21.3% 47.2% 1.43 0.85% 2.33

MEAN (“YES” group only) 3.06 2.07% 3.12

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