“Scholarships” Are Driving Students into Debt

Scholarships Risk Aggressive Debt Collection

Nothing can be more important for young people than the desire to learn. There are many cases, however, when scholarships intended to support learning can become a great financial burden after graduation because of the need to start repaying student loans. The repayment burden can dampen enthusiasm for work and affect marriage and childbirth decisions. Even the recipients of public scholarships offered by the Japan Student Services Organization have been suffering from the negative consequences of student loans.

Students seeking loan-based scholarships are rising rapidly due to the high cost of education and the difficulty many families have of paying tuition. Many students now graduate with debt of several million yen and must start their working careers with excess liabilities. With the growth of low-wage, nonregular employment, people cannot afford to pay back their loan-based scholarships. In response, JASSO is strengthening its debt collection efforts, such as by placing people on blacklists, assigning collection to external agencies, and initiating court-mediated summary procedures. Many people will consequently be driven into a corner no matter how hard they work.

Relief Measures That Do Not Provide Relief

Loan-based scholarships differ from other types of loans in that they are extended while future employment and income are unknown, meaning that there is an inherent risk of loan delinquency. Inasmuch as they are a form of scholarship, relief measures should be built into the system to address cases when delinquency occurs. Unfortunately, existing relief measures are extremely inadequate.

For example, people experiencing difficulty repaying a JASSO loan because their annual income is less than ¥3 million can have the repayment period suspended. This measure, however, only applies for 10 years. Once 10 years have passed, the measure cannot be used even if annual income remains very low. Limitations in how the relief measure is applied are another problem. When people are delinquent, they must resolve their delinquency before they can take advantage of the relief measure, such as by paying the entire amount of late charges and principal payments in arrears. These people, however, are delinquent because they are unable to repay their loan; it makes no sense to offer relief only to those who end their delinquency.

Such application of relief measures has been criticized repeatedly for some time. In April 2014, JASSO extended the suspension of repayment in cases when the borrower’s annual income was less than ¥2 million. In December of the same year, however, JASSO restricted the use of this new measure. It stated that delinquency will not be suspended for people who have gone to court or for people who claim that the statute of limitations applies to part of the repayment obligation. It is unreasonable to restrict relief for people with financial difficulties just because they have taken their case to court or claim that the statute of limitations has run out; they have every right to do so. JASSO states, moreover, that whether or not such relief measures are applied is at its discretion and is not a right of the scholarship recipients. Giving such discretionary powers to the lender will strip the relief measures of their meaning.

Expanding Grants and Interest-Free Scholarships

Clearly, JASSO loans are scholarships in name only. Many of the people suffering from the repayment burden are victims of circumstances beyond their control.

The negative consequences of such “scholarships” cannot be prevented with efforts by individuals alone. The entire system needs to be overhauled. I advocate the following reforms:

• Educational expenses that are extremely high compared to other nations should be reduced.
• Grants should be expanded.
• Loan-based scholarships should be made interest free.
• Repayment should be made flexible in line with repayment capacity.

Some Progress Achieved

While the scholarship system has many problems, the influence of public opinion has resulted in some steps toward improving the system.

First, grant scholarships without a repayment requirement were finally introduced in fiscal 2017—a first for government scholarships. Eligible students are those facing difficulties pursuing higher education, such as those raised in children’s homes and children from low-income, tax-exempt households. This scholarship, however, is extremely limited in scope. There are only about 20,000 recipients per academic grade, who will still need to take out loans since monthly stipends are between ¥20,000 and ¥40,000. They also need to maintain high grades to qualify. Children raised in difficult circumstances frequently do not have a supportive studying environment. Having such a standard will severely limit the effectiveness of the scholarship. Also, repayment may be demanded when grades are poor. This standard, however, is vague, and it is possible that people will not apply for the scholarship out of fear of the potential repayment burden. While the introduction of a grant scholarship is a step forward, its design still has many flaws.

Second, new efforts have been made for interest-free loans. JASSO scholarships can be either interest bearing or interest free. The pool of funds for interest-free scholarships is limited, however, so students who qualify may still be unable to receive them. The Ministry of Education, Culture, Sports, Science, and Technology has stated that, starting in the current fiscal year, all qualifying students desiring interest-free scholarships will be able to receive them. The ministry reports that so-called residual qualifiers total 24,000 students, a figure that many educators feel is too low. Income and grade standards for interest-free loans have been tightened, which has greatly reduced the number of residual qualifiers; the 24,000 figure of should be understood with this in mind.

Third, a repayment plan adjusted for income has been introduced. In fiscal 2017, a new scholarship system was introduced where monthly repayments are adjusted for income. The design of this system, however, falls short of its objective since, based on the rationale of a limited budget, tax-exempt persons, including those with zero income, are still required to make monthly payments of ¥2,000. While repayment can be suspended for people with low incomes, the problems associated with relief measures discussed above have not been fully addressed. Also, the issue of smaller monthly payments lengthening the repayment period has not been addressed. Another problem is the income used to determine monthly payments, which is the sum of the income of the scholarship recipient and the income of the household breadwinner who is not a party to the scholarship agreement.

Supporting Education with the Whole of Society

Policymakers claim there are no funds available for scholarships. The real issue, then, may be the extremely limited funds that are allocated for education in Japan. The Organization for Economic Cooperation and Development reports that the ratio of public educational expenditures to GDP, which averages 5.4% for all member nations, is just 3.6% for Japan—a figure that falls to 0.5% for higher education, the lowest figure among member nations. This reality stems from the mistaken application of the beneficiary-pays principle, where people receiving an education bear its costs. Education, however, is not just meant for the individual. It also benefits society as a whole. As things stand, students must take out large loans to pay for their education depending on their parents’ financial situation. This goes against the principle that “all people shall have the right to receive an equal education” stipulated in Japan’s Constitution and cannot be called fair.

There is an urgent need to allocate a level of funds for education similar to other OECD nations and to begin a national dialogue on the infrastructure needed to support the development and education of children and young people.