With the pressures of inflation, more and more students are taking out loans to make ends meet.
In Finland, although tuition is free and scholarships are provided by the government, many students still opt for student loans to cover their extra living expenses.
The total value of state-guaranteed student loans reached around 5.5 billion euros in April, according to the Bank of Finland’s own statistics. Markus Aaltonenan economist at the Bank of Finland, said this level is breaking records.
“A record number of student loans were taken out. For example, January 2022 saw the highest number of loans taken out in the history of student loans,” Aaltonen told Yle.
Average student debt per student has also increased in recent years. Aaltonen believed that the main reason more students are taking out loans is because of its record high interest rate. In January, the average interest rate on new loans was 0.09%.
“One of the reasons is partly due to a 2017 scholarship reform that allowed students to take out higher loans afterwards,” Aaltonen explained.
Inflation eats away at students’ purchasing power
Ilpo Lahtinen, a special planner with the Finnish Social Insurance Institution (Kela) student support group, said inflation had weakened the purchasing power of students receiving study allowances. According to Lahtinen, the early indexation of social security benefits presented by the government in May will not save the student loan situation, since 70% of student benefits take the form of loans.
Lahtinen added that regular index adjustments would not affect the amount of student loans.
“It’s been 5 years since the last increase in monthly student loan amounts. In this last year, prices have increased by more than 10%,” Lahtinen told Yle.
Lahtinen estimated that over the past five years, prices have eaten up 65 euros from students’ monthly purchasing power.
“This could soon become a normal situation where a student cannot live on study allowance alone and has to resort to additional income support. This would be unsustainable for everyone involved,” Lahtinen said.
Raising fares can increase costs
There may be more problems with rising inflation and interest rates on student debt.
“We currently have over 10,000 people with a student loan over 30,000 euros. The current interest rate hike does not affect anyone, but if there is a 4% increase in interest rates on student loans, it will add an additional cost of 100 euros per month in student loan repayments. For someone on a low income, that’s a lot of money,” Lahtinen said.
According to Aaltonen Student Loans, 95% of new student loan disbursements are linked to Euribor, of which 70% are linked to 12-month Euribor.
“Currently, by the end of 2023, the market will value Euribor at around 2%. In other words, there is an increase in interest rates on student loans,” Aaltonen told Yle.
The 12-month Euribor has risen by around 0.5 percentage points since the end of April.
However, inflation may facilitate repayment
Rising prices should also increase overall wages. If someone who has taken out student loans finds employment in line with wage developments and interest rates do not rise significantly, inflation may reduce the real value of student debt.
However, this is not the case if interest rates rise significantly. Lahtinen did not consider interest rates for loans worth more than 30,000 euros to be problematic if the person was employed after graduation. However, future employment trends are difficult to predict.
“Now the war in Ukraine threatens employment development, but there is no panic yet. However, it would be wise for lawmakers to consider whether steps could be taken to increase the security of student loans. that even the most disadvantaged graduates won’t encounter unreasonable problems,” Lahtinen explained.
Kela supports low-income student debtors with an interest subsidy, and in addition, students who graduate on time receive student loan credit from Kela.