Repayment plan

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In finance, a repayment plan is a structured repaying of funds that have been loaned to an individual, business or government over either a standard or extended period of time, typically alongside a payment of interest. [1] Repayment plans are prominent within the financial industry of a national economy where liquid funds are in high demand to assist in investment opportunities, governmental expenditure or personal finance. The term first saw prominence with its use by the International Monetary Fund to describe its form of financial loan repayment from individual nations. Typically, the term "repayment plan" refers to the system of Federal Student Aid in the United States of America, which assists in covering tertiary education expenses of domestic students. [2]

Contents

History

Repayment plans have historically existed within the economies of the developed world where the financial markets are more established and have expanded over a longer period of time. During the expansion of the global economies during the 20th Century, the case for greater regulation and development of finances had grown substantially, [3] with global debt increasing as nations invested domestically and internationally to fuel their own economic growth. Borrowed funds from both foreign governments and international financial institutions aided the growth of availability for liquid funds for world governments, while domestically, consumers saw lower interest rates, simultaneously making the attraction of loans more enticing. Repayment plans are thus often referred to as loan repayment or debt financing strategies.

The International Monetary Fund is a global credit organisation. Dark green - Members of the IMF. Light Green - Countries who have not committed to membership International Monetary Fund (art.VIII).png
The International Monetary Fund is a global credit organisation. Dark green - Members of the IMF. Light Green - Countries who have not committed to membership

Historically, the International Monetary Fund acted as the principal international credit body and has existed since 1945. It primarily operates as a credit organisation with a long-term goal of facilitating greater international financial stability between 189 countries globally [4]
One of the functions of the International Monetary Fund is distributing loans to countries in financial crises while simultaneously aiming to improve general economic conditions globally. [5] By issuing loans, the International Monetary Fund and the receiving nation agree upon a pre-specified repayment strategy called a 'system of conditionality'. [6] The 'system of conditionality' operates similarly to the financial jargon of 'repayment plan' and refers to a plan cooperatively managed by both the International Monetary Fund and the receiving nation in overcoming the financial hardship which led the nation in seeking IMF assistance. [6] For example, on May 3, 2010, Eurozone countries alongside the IMF announced their intention to enforce a three-year €110bn loan, with a 5.5% interest rate, [7] with a 'system of conditionality' implemented i.e. on a condition that austerity measures would be enacted by the Greek government in accordance with the life of the loan.

Systems of conditionality are not restricted to nations however, and individuals and businesses can also be subjected to conditionality by the financial institution or government body which has approved the loan. After agreeing to all conditions and other aspects of financing a loan, for example approved prior credit history and credit score, repayment plans and loans can be implemented relatively quickly. However, creditors do not always have a regard for individual circumstances which can violate personal financial stability, which can lead to further issues which do not necessarily have to be accounted for by credit providers. [8]

As the means of acquiring finance have increased, so have respective organisations which can assist in managing depleted personal funds and clearing individual debt, including government websites such as the Australian Securities and Investment Commission's MoneySmart website, [9] and through independent creditors.

Recent years

The Greek government debt-crisis

The collapse of the Greek national economy following the 2007–2008 financial crisis, resulted in political instability, social exclusion and economic 'brain-drain' in Greece. [10] Government policy and reform spanned 12 rounds of tax increases, spending cuts and a number of bailout loans by the International Monetary Fund and the Eurogroup in the years 2010, 2012 and 2015. [11] It became the first developed country to fail to repay an IMF loan on time, following a delay of 20 days in late June 2015. [12] National governmental debt approached €323bn by July 2015, below the OECD average, and since 2009, the debt had grown €18bn, from €300bn to €318bn (a 6% increase overall). Months prior to the implementation of the Second Economic Adjustment Programme, leaders of Eurozone agreed to extend loan repayment periods from 7 years to a minimum of 15 years and to reduce interest rates to 3.5%. [13] These changes succeeded a reduction in Greek primary deficit from €25bn in 2009 to €5bn in 2011. However, conditions of the recession had worsened despite the austerity measured implemented at the time, leading to a 7.1% fall in national GDP and a rise in unemployment from 7.5% in late 2008 to 19.9% in November 2011. [14]

The Third Economic Adjustment Programme implemented from July 2015 to August 2018 was the last of the consolidated austerity programmes implemented by Greece in the attempt to recover from the effects of the 2007–2008 financial crisis. An €86 billion loan was provided to Greece over the three-year period and assisted in a final restructure of the Greek economy. [15] It is not considered the last of the 'bailout programs' offered to Greece as the nation continues to receive loans from external creditors such as the IMF and continental banks including the European Investment Bank, Eurogroup and European Central Bank. [15]

Following the election of right-wing political parties in the regional and Euroelections during May 2019, Greek stocks rose by approximately 9.10%. [16] This coincided with greater investor confidence in the Greek economy, which showed positive signs of recovering economic growth and a reduction in national debt. [16] In the same period, Greece intended to repay €3.9bn to the International Monetary Fund earlier than originally agreed upon, however this action has been met with negative criticism by critics and creditors, who cite increased fiscal concerns and new potential sanctions as a result of the election result. [17] [18] The European Stability Mechanism's Board of Directors have praised Greece's ability to meet recent repayment deadlines, claiming that Greece's continuation of economic reforms set by the International Monetary Fund will "boost Greece's growth potential" in the long term but there will be a persistent push for Greece's repayment of all its loans. [18]

Federal Student Aid

Federal Student Aid refers to the United States' government's financial initiative in assisting domestic and international students access higher education. [19] Payments begin after the graduation of a student, leave school or change if the students' rate of attendance is shortened. It covers a range of loans which cater to a diverse range of student needs.

One repayment plan option for student loans is a graduated repayment schedule. Borrowers can lower their monthly loan payments for a while — without extending their repayment period — by opting for graduated repayment. A Graduated Repayment Program lets the borrower make smaller payments back toward their student loans at the start of their new term. Every 2 years on this program the monthly payment will increase. This is meant to match with the increased income of the borrower over time. [24]

The Federal government of the United States are not the only providers of student loans, as private student loans can also be obtained by student through banks, credit unions, state agencies and schools. Federal loans are subjected to fixed interest rates, no credit checks and option to have the type of repayment plan selected. For example, the student may elect to have their repayment connected to a percentage of their discretionary income, or as a fixed amount regardless of income level. [25]

Criticism

Repayment plans have the potential to bring upon individuals other financial issues, including financial hardship in the form of poverty, and also reliance on welfare systems. Taxpayers, students and other demographics can be drawn into repayment strategies which may not be financially feasible and may result in a default or repossession of assets. In the United States, individuals can initiate repayment plans with the IRS with instalments estimated based on annual income of the individual if they are not able to deliver their full tax amount. Despite the IRS mandated to cease acceptance of repayments once an individual is classed as experiencing “economic hardship”, it has been suggested that the IRS has been allowing repayments from individuals who are suffering financially despite demonstrating incapability of repayment. [26] For the IRS to analyse an individual's repayment potential, the individual must submit documents with supporting and relevant financial information so that an appropriate repayment system can be established, which not all individuals would be capable of producing. These repayment plans provided by the IRS to taxpayers have resulted in 39% of taxpayers [26] in the U.S. defaulting on their plans based on incorrectly estimated instalments which can force individuals into difficult financial situations.

Students in the U.S. have also levelled criticism at the Federal government, with past and present students owing approximately US$1.5 trillion in outstanding student loans. Students have multiple ways of clearing student debt through invoking bankruptcy, however if it is not cleared, loan repayments can affect future budget expenses. For a student to file for bankruptcy, they must undergo The Brunner Test [27] to measure the extent of the financial hardship experienced by the student. The Brunner Test for students has to be satisfied by 3 means:

These requirements can be fulfilled through a bankruptcy court with students presenting all necessary documents, as well as completing a means test, which relates personal income to median income on a state-wide scale, with an approximately equivalent household size. [27]

Measures to counter larger amounts of student debt are through “grace periods” provided by the office of Federal Student Aid, which offers a six to nine-month time-frame where graduate students do not have to begin repaying their student loan until after the assigned time period. However, “grace periods” allow for the accrual of interest, which is then added to the principal amount, costing students more. [28]

Repayment plans vary according to lender and recipient, and can be based upon income, a fixed rate, a variable rate, or on systems of conditionality. For individuals who are unable to budget, or contain expenses, entering and thereafter completing repayment plans can be extremely difficult and result in poverty, bankruptcy or homelessness. For individuals, including those of the millennial generation who are facing great economic uncertainty, [29] maintaining and managing a budget [30] can be particularly difficult and challenging, as the rising costs of standards of living including food, utilities, property and finance [31] can force individuals into repayment plans which may be detrimental to long-term standard of living.

See also

Related Research Articles

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The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution funded by 190 member countries, with headquarters in Washington, D.C. It is regarded as the global lender of last resort to national governments, and a leading supporter of exchange-rate stability. Its stated mission is "working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world."

Debt relief or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.

<span class="mw-page-title-main">Loan</span> Lending of money

In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money.

<span class="mw-page-title-main">Student loan</span> Type of loan for educational expenses

A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. It may differ from other types of loans in the fact that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in school. It also differs in many countries in the strict laws regulating renegotiating and bankruptcy. This article highlights the differences of the student loan system in several major countries.

<span class="mw-page-title-main">Government debt</span> Total amount of debt owed to lenders by a government/state

A country's gross government debt is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit occurs when a government's expenditures exceed revenues. Government debt may be owed to domestic residents, as well as to foreign residents. If owed to foreign residents, that quantity is included in the country's external debt.

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In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment. Unsecured debts are sometimes called signature debt or personal loans. These differ from secured debt such as a mortgage, which is backed by a piece of real estate.

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A Federal Perkins Loan, also referred to as a Perkins Loan, was a need-based student loan offered by U.S. Department of Education from 1958 until 2017. Created as part of the Federal Direct Student Loan Program, the Perkins Loan served to assist American college students fund their post-secondary education. The program was named after Carl D. Perkins, a former member of the U.S. House of Representatives from Kentucky.

A Stafford Loan was a student loan offered from the United States Department of Education to eligible students enrolled in accredited American institutions of higher education to help finance their education. The terms of the loans are described in Title IV of the Higher Education Act of 1965, which guarantees repayment to the lender if a student defaults. As of July 1, 2010, Stafford Loans are no longer being offered, having been replaced with the William D. Ford Federal Direct Student Loan Program.

The William D. Ford Federal Direct Loan Program provides "low-interest loans for students and parents to help pay for the cost of a student's education after high school. The lender is the U.S. Department of Education ... rather than a bank or other financial institution." It is the largest single source of federal financial aid for students and their parents pursuing post-secondary education and for many it is the first financial obligation they incur, leaving them with debt to be paid over a period of time that can be a decade or more as the average student takes 19.4 years. The program is named after William D. Ford, a former member of the U.S. House of Representatives from Michigan.

A private student loan is a financing option for higher education in the United States that can supplement, but should not replace, federal loans, such as Stafford loans, Perkins loans and PLUS loans. Private loans, which are heavily advertised, do not have the forbearance and deferral options available with federal loans. In contrast with federal subsidized loans, interest accrues while the student is in college, even if repayment does not begin until after graduation. While unsubsidized federal loans do have interest charges while the student is studying, private student loan rates are usually higher, sometimes much higher. Fees vary greatly, and legal cases have reported collection charges reaching 50% of amount of the loan. Since 2011, most private student loans are offered with zero fees, effectively rolling the fees into the interest rates.

<span class="mw-page-title-main">Mortgage</span> Loan secured using real estate

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Government sponsored Student Loans in Canada was designed to help post-secondary students pay for their education in Canada. The federal government funds the Canada Student Loan Program (CSLP) and the provinces may fund their own programs or be integrated with the CSLP. In addition, Canadian banks offer commercial loans targeted for students in professional programs.

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References

  1. ↑ Alexandra Twin. "Repayment Is Paying Back Money Borrowed from a Lender". Investopedia. Retrieved 13 May 2019.
  2. ↑ "Federal Student Aid". Federal Student Aid. Retrieved 13 May 2019.
  3. ↑ "Commentary: Record $164 trillion global debt - a big number, but..." Reuters. 19 April 2018. Archived from the original on 1 March 2019. Retrieved 13 May 2019.
  4. ↑ "About the IMF". IMF. Retrieved 11 May 2019.
  5. ↑ "IMF Lending". IMF. Retrieved 12 May 2019.
  6. 1 2 "IMF Conditionality". IMF. Retrieved 12 May 2019.
  7. ↑ Traynor, Ian (2 May 2010). "EU debt crisis: Greece granted €110bn aid to avert meltdown". The Guardian. ISSN   0261-3077 . Retrieved 13 May 2019.
  8. ↑ Reynolds, Emma (25 May 2019). "Alcoholic mum's radical step to get her kids back". News.com.au. Retrieved 4 June 2019.
  9. ↑ Commission, c=au;o=Australian Government;ou=Australian Government Australian Securities & Investments (11 December 2018). "Managing debts". www.moneysmart.gov.au. Retrieved 4 June 2019.{{cite web}}: CS1 maint: multiple names: authors list (link)
  10. ↑ "Greek Bailout: IMF and Europeans Diverge on Lessons Learnt". Chatham House. 16 August 2018. Retrieved 12 May 2019.
  11. ↑ "Eurogroup statement on Greece - Consilium". www.consilium.europa.eu. Retrieved 13 May 2019.
  12. ↑ eub2. "IMF: Greece makes overdue payments, no longer in default — EUbusiness.com | EU news, business and politics" . Retrieved 12 May 2019.{{cite news}}: CS1 maint: numeric names: authors list (link)
  13. ↑ "European Council - A common response to the crisis situation". wayback.archive-it.org. Archived from the original on 1 November 2011. Retrieved 13 May 2019.
  14. ↑ "Euro area unemployment rate at 10.7%" (PDF). Eurostat . 1 March 2012. Archived from the original (PDF) on 1 March 2012. Retrieved 23 August 2023.
  15. 1 2 "Greece: the third economic adjustment programme - Consilium". www.consilium.europa.eu. Retrieved 13 May 2019.
  16. 1 2 Mourdoukoutas, Panos. "Greek Stocks On Fire, As The Leftist Bubble Is Beginning To Burst". Forbes. Retrieved 3 June 2019.
  17. ↑ "Fiscal risk has increased for Greece, Eleftheria Kourtali | Kathimerini". www.ekathimerini.com. Retrieved 3 June 2019.
  18. 1 2 "Greece's early IMF repayment plan gets green light". New Europe. 5 May 2019. Retrieved 3 June 2019.
  19. ↑ "About Us". Federal Student Aid. 24 October 2018. Retrieved 12 May 2019.
  20. ↑ "Subsidized and Unsubsidized Loans". Federal Student Aid. 18 September 2018. Retrieved 13 May 2019.
  21. ↑ "PLUS Loans". Federal Student Aid. 22 January 2019. Retrieved 13 May 2019.
  22. ↑ "Interest Rates and Fees". Federal Student Aid. 7 November 2018. Retrieved 13 May 2019.
  23. ↑ "Perkins Loans". Federal Student Aid. 13 August 2018. Retrieved 13 May 2019.
  24. ↑ "Federal Student Aid". studentaid.gov.
  25. ↑ "Repayment Plans". Federal Student Aid. 15 November 2018. Retrieved 13 May 2019.
  26. 1 2 Keshner, Andrew. "People behind on their taxes are being 'set up to fail' by the IRS, watchdog says". MarketWatch. Retrieved 4 June 2019.
  27. 1 2 3 "Can Student Loans Be Wiped Out by Filing for Bankruptcy?". finance.yahoo.com. 3 June 2019. Retrieved 4 June 2019.
  28. ↑ Adamczyk, Alicia (8 May 2019). "How the student loan 'grace period' can actually make your debt problem worse". CNBC. Retrieved 4 June 2019.
  29. ↑ Chen, James. "Millennials: Finances, Investing, & Retirement". Investopedia. Retrieved 4 June 2019.
  30. ↑ Fottrell, Quentin. "This is why millennials can't have nice things (or save any money)". MarketWatch. Retrieved 4 June 2019.
  31. ↑ Leonhardt, Megan (2 June 2019). "Over a third of college students already have credit card debt". CNBC. Retrieved 4 June 2019.
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