Loan firm aims to aid middle class

The University of British Columbia in Vancouver is investigating a deal with a private loan company that will bail out middle-class students who fail to qualify for government financial aid schemes.

FirstStudentLoan, based in Toronto, aims to lend up to C$25,000 (£10,000) to 300,000 underfunded middle-class students ineligible for government-loan programmes because their families earn too much, co-founder Elian Terner said.

Statistics Canada said a fifth of applicants for government student loans were turned down.

A big selling point of the FirstStudentLoan scheme is the short wait for approval. "A lot of students apply for government-loan programmes (in the spring) but don't find out till the summer that they haven't qualified," Mr Terner said. "We want to take some worry away and give a preliminary answer within 48 hours."

But critics said that such rapid access to credit would encourage irresponsible borrowing. Unlike government loans, which defer interest payments until after graduation, FirstStudentLoan would bill interest from the outset. It would also require payment of a "risk premium" added to the principal of any loan. Initial reports suggested this could be as high as 12 per cent of the amount borrowed.

UBC allocated C$50,000 to study the potential costs of underwriting its students' private borrowing. FirstStudentLoan could prove a "valuable funding tool", according to an internal report.

An early proposal to charge interest at up to best commercial rates plus 6 per cent (prime-plus-6) angered student leaders.

"FirstStudentLoan has nothing to offer except crushing debt loads and punitive interest rates," said Chris Giacomantonio, student union president at Simon Fraser University, also in Vancouver.

FirstStudentLoan said the target had since been reeled back to prime-plus-2.

But Gregg Macdonald, executive director in the president's office at Simon Fraser, said it was "highly unlikely" it would pursue an arrangement with the company because of student opposition.