A private loan company is courting Simon Fraser University and the University of British Columbia with a controversial plan to offer students fast on-line credit, sparking concerns that student debt levels will explode.
According to documents obtained by the Bulletin, FirstStudentLoan, a Toronto- and Vancouver-based company established last year, has approached both SFU and UBC with proposals to establish "new financing solutions" for students.
The proposals entail granting eligible students nearly instant credit-based loans of up to $25,000 a year. Based on their creditworthiness, students could be required to pay a risk premium of up to 12 per cent and be charged interest on their loans as high as six percentage points more than the prime lending rate.
In a presentation to SFU officials in January, FSL representatives argued that years of government cutbacks to universities and rising tuition fees have created a large pool of middle-class students who can't afford to pay the full cost of tuition and living expenses, but who are nevertheless ineligible for government student loans and other forms of assistance.
"Government programs are designed to provide access to those students that are most in need," FSL representatives said in their presentation."We believe that we can help all students address the financing gap by taking a new and innovative approach to lending to students."
Chris Giacomantonio, president of the Simon Fraser Student Society, agrees that more and more students are facing a financing gap, but he doesn't believe that allowing a private, for-profit company to market instant loans on campus is the best way to fill that gap.
"This will increase student debt to levels not yet seen in Canada," Giacomantonio says. "The best way to turn a profit is to advertise your service and to have as many people as possible use it and to give out as many loans as possible, so long as those loans don't present a significant risk of default."
In a letter to SFU's director of academic resources sent last month, Giacomantonio urged the university to reject the FSL proposal, arguing the "more privately-administered loans are made readily available, the greater student debt will become.
"While we understand that the loans from FirstStudentLoan are not unique, insofar as students can seek private loans from financial institutions, we believe that FSL is another step in the direction of privatizing either the bulk of or the entirety of the student loans in Canada," Giacomantonio wrote.
Calls made to FirstStudentLoan for this article were not returned.
Under the FSL-SFU proposal, instant loans up to $12,000 annually would be available to undergraduates, $15,000 to graduate students and $25,000 to students in professional programs. Unlike the banks which provide loans only to students who have coborrowers or who are enrolled in professional programs, FSL promises to offer personal loans to virtually any registered students who meet its basic eligibility requirements.
Based on the SFU proposal, an undergraduate student with a fair credit rating and borrowing $1,000 (loan amount minimum) without a coborrower would be assessed an immediate 12 per cent risk premium. The premium, kept by FSL as a "guarantee fee," would raise the total amount borrowed to $1,120. Interest of between two and six percentage points above the prime rate would begin accruing immediately, although students would have the option of making no payments while remaining in school.
In addition, universities are being asked to assist in administering FSL loans and to provide the company with a computer link to their student records. Upon receiving an instant loan application from a student, FSL would electronically run a credit check and verify the student's registration status by directly accessing university records. Students could receive their decisions on loan applications within seconds. They would then print their approval form and take it to their university's financial aid office, where they would sign the loan documentation before having funds transferred to their bank account or directly to the institution.
It's that ease of access, coupled with what is expected to be an aggressive marketing campaign on campus, that has some worried about the program's potential to encourage abuse.
"The first step to irresponsible borrowing is to make money easily available, which is what FSL does," argues Giacomantonio. "FSL readily admits and accepts that they can't prevent the program from being abused."
At UBC, where FSL has also approached the administration, a report on the proposal prepared for the University Facilitated Loans Steering Committee warned that: "Fast credit is already an issue with credit cards and now could be an issue with a university-sanctioned program."
Nevertheless, the committee gave the go-ahead March 26 to a pilot loan project in partnership with FSL. While committee members recognized the potential for abuse, according to the minutes of the meeting it was argued that "we can't waste time and resources trying to eliminate misuse (of FSL loans)."
UBC has approved an initial $50,000 expenditure to gather research and data for the pilot program, although members of the loans steering committee feel the real cost will be closer to $100,000.
But that may be just the beginning of the university's financial commitment. UBC is also planning to underwrite the program by providing FSL with guarantees on loans so that the risk premium for students can be reduced.
It's not clear how much money UBC will have to pay FSL in the form of guarantees until the total default risk can be determined. However, according to the minutes of the March meeting of the loans steering committee, a representative from the company noted that: "UBC needs to understand the size of the program, the size of the monetary risk and the size of UBC's commitment to guaranteeing the loans."
For now, the university and FSL are attempting to obtain student loan default data from BC's Ministry of Advanced Education in order to complete a feasibility profile for UBC underwriting the loans. At their March meeting, some members of the loans steering committee expressed concern that the Ministry may not be willing to release that information for privacy reasons, leading to a suggestion that UBC officials find some way to "circumvent regular channels politically" to obtain the data.
Back at SFU, Chris Giacomantonio says he's concerned that universities, facing serious government funding constraints, will be tempted to use the easy availability of personal loans such as those proposed by FSL to justify even higher tuition fees.
"A program like the one proposed by FirstStudentLoan would be another source of loan money, not administered publicly, which would allow post-secondary institutions to raise their tuition as high as people were willing to borrow, while at the same time allowing government to further decrease their per-student funding," Giacomantonio says.