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Japanese Banks Bail on Low-Interest Education Loans
Source: yomiuri.co.jp
Source Date: Friday, August 20, 2010
Focus: Institution and HR Management
Country: Japan
Created: Aug 23, 2010

In an unexpected side-effect of new regulations meant to deter aggressive sales practices, some banks, including Resona Bank, have stopped accepting applications for low-interest education loans designed for university and vocational school students.

Three banks operated by Resona Holdings, Inc. and some regional banks have terminated the low-interest loans, designed to help pay admission, tuition and other fees. The loans are extended to students' parents in cooperation with the educational institutions, which sometimes act as guarantor or contribute to interest payments.

It is the first time a major bank group has been known to withdraw from a cooperation loan program of this nature.

The cooperation loan program hit a snag when the revised Installment Sales Law was enacted in December.

Bolstered regulations in the revised law target consumer credit companies and sales firms that employ aggressive tactics to sell expensive health foods and other products, methods that became a social problem as people were pressured into oppressive repayment programs.

But the law can be interpreted as also applying to banks and parties that cooperate with banks on loan programs.

Under the revised law, banks that offer loans in cooperation with educational institutions must register with the Economy, Trade and Industry Ministry, and are subject to on-site inspections. The banks must also periodically report the balances of their customers' loans to credit information companies.

The cost to banks of reconfiguring their systems to meet these obligations may run to several hundred million yen.

In many cases, banks have chosen to stop extending the cooperation loans to avoid the additional work and financial burden, industry sources said.

For the educational loans in question, a bank extends a loan to a student's parent, with the application being made through the university or vocational school. Sometimes the school may act as guarantor or subsidize interest accrued on the loan.

Some cooperation educational loans allow repayments of the principle to be suspended until after graduation.

Regular educational loans, which are applied for directly from banks, have higher interest rates.

Universities often suggest cooperation loans to students who seek advice about financial difficulties, along with other assistance options such as scholarships.

Resona Bank, one of the three banks operated by Resona Holdings, stopped accepting applications for cooperation loans in June. The two other banks are Saitama Resona Bank and Kinki Osaka Bank.

The bank had offered loans in cooperation with about 80 universities, including Waseda and Keio universities, and some vocational schools. Interest on the loans was around 3.5 percent, one to 1.5 percentage point lower than standard educational loans.

Resona had extended such loans to several hundred students annually, and currently has about 5,000 outstanding cooperation education loans.

As an alternative, the bank said it would lower the interest rate of its standard educational loans to the cooperation loans' level, but would limit the application period to around the start of the academic year.

Regional banks have also stopped offering educational loans in cooperation with educational institutions.

Bank of Kyoto ended its program in December. It now offers two different direct educational loans, which have slightly higher interest rates.

Shizuoka Bank, North Pacific Bank and Gunma Bank have also terminated their cooperation educational loan programs.

Three major banks, including Bank of Tokyo-Mitsubishi UFJ, plan to maintain their cooperation loan program, but may exclude some universities in the future, according to sources.
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