Banks stripped of student loan role

March 17, 2000

MONTREAL

Canada's federal government has stripped three major banks of the task of managing the country's student loan programme, and taken on the task itself.

The ministry responsible for the Canada Student Loans Program said it had no choice but to take back management of the Can$1.8 billion (Pounds 785 million) programme after the banks turned down an improved offer of compensation for the risks it involves. The government had offered an increase from 5 to 9.5 per cent of total money lent to safeguard the banks against a rising default rate.

The federal human resources department's decision not to renew the contract was greeted with surprise by the banking sector. The Royal Bank said it wanted to continue managing student loans but only under commercially viable conditions.

The banks say the default rate is too high and have been publicly complaining at the task since they took it over in 1995. Official figures show a rise in the default rate from 24 to 30 per cent in the first two years of the programme, although it has recently dropped back to per cent.

The government's involvement is likely to be a short-term measure. Thomas Thownsend, director general of the learning and literacy directorate, said that taking back the programme was the "second-best option".

The government wants eventually to put the administration of the scheme out to tender.

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