Banks back in loans business

The Royal Bank of Canada has re-entered the student-loan business by selectively taking on lower-risk customers.

The bank has partnered Queen's University, in Kingston, Ontario, to offer a loan that will be targeted at a wealthier class of students. The partnership comes not long after the banks stepped out of the Canada Student Loans Program, which they found too risky. Three chartered banks used to provide student loans until their demands forced the government's hand.

The banks, looking at the default rate at the time - 12.6 per cent at universities and 45.6 per cent at private (mostly vocational) institutions - demanded more money from the government. The government had already nearly doubled the amount it gave to offset risk to 9.5 per cent of all money lent out, on top of interest. In March 2000, the government dropped the banks and gave the job of distributing the government-guaranteed loans to a private firm.

About half of all Canadian university students are ineligible for the CSLP, usually because of high parental income. Tuition fees have more than doubled in the past ten years, and many ineligible students feel the need to take out loans.

Queen's, whose students have traditionally been better at repaying their loans, will, through this partnership, guarantee each loan. The service will be costlier for students. Government loans are interest free until six months after graduation. These loans, to be offered at 1 per cent above prime rate, will see interest accumulating at the outset of studies.

Jo-Anne Brady, Queen's registrar, said the bank probably selected Queen's because it had fewer students who had difficulties paying back their loans. In 2001, Queen's had one of the lowest default rates among Ontario universities, with 4.4 per cent of its borrowers not keeping up with payments. The University of Waterloo's default rate is the lowest in Canada, at 2.9 per cent, while Carleton University is highest at 12.4 per cent.

Ms Brady said the guiding principle of the partnership had been one of accessibility. "This increases the number of students eligible for student financing."

Ian Boyko, national chair for the Canadian Federation of Students, agreed that there was a growing number of students whose parental income was too high to qualify for government loans and who needed assistance. But he said a system of increased non-repayable bursaries was a better alternative to more loans, which would simply increase the already high rate of student debt.