A $12 Billion Student Loan Break Puts Chile Leader on Back Foot

(Bloomberg) -- Chilean President Gabriel Boric is increasingly grappling with a progressive campaign promise that has proved harder in practice to fulfill: forgiving $12 billion in student loans.

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Boric is planning to introduce a proposal on college debt in September and is expected to discuss the issue in his annual address on Saturday, even as top officials shift their wording from “forgiveness” to “solution.” It appears to be a renewed push from a president eager to regain his footing, especially among the powerful contingent of young voters who helped catapult him into the presidency.

The pile of government-backed debt has been riling backers and opponents. Those in favor of help say salaries in Chile are too low to pay off college debts, while those against say forgiveness favors people who are already privileged enough to access higher education. Boric’s situation parallels US President Joe Biden’s student debt relief plans, which faced similar criticism before the $400 billion initiative was struck down by the US Supreme Court. Still, Biden has marched on with more focused relief.

Chilean government officials have been vague on details of the upcoming proposal. Finance Minister Mario Marcel told Bloomberg in an interview in New York that the student debt plan will be fair and responsible. “That means it will not take resources away from other public policy areas,” Marcel said. Interior Minister Carolina Toha has previously suggested the administration will not give debtors a “clean slate.”

“The government is not going to do something dumb,” Toha told a Chilean radio station. “Something dumb would be to use money from poor people to pay up the debts of others who had access to higher education.”

At the heart of the struggle is also Boric’s identity as a progressive politician who got his start as a college student leading protests for more affordable education. Some of his closest advisers are also former student leaders.

But since taking office in 2022, Boric has struggled to turn progressive promises into reality due to a lack of support in congress. He backed a rewriting of the constitution, but the final text was deemed too extreme, as was a second more conservative one. Proposals for a pension and tax reform are advancing very slowly.

Now, even his ruling coalition is divided on the loan forgiveness issue over concerns about supporting those who haven’t paid their debts and also due to uncertainty regarding how to finance the cost.

“The backlash has been so harsh that they have had to almost retract completely,” said Kenneth Bunker, a professor at Universidad San Sebastian in Santiago. He thinks it’s unrealistic to believe a bill of this type could pass, and adds that the proposal itself is an attempt to rally the support of young voters ahead of the 2025 election year. Boric cannot serve a second, consecutive term, but another progressive could continue his platform.

Low Salaries

Chile’s main student loan program, known as the Credit with State Endorsement (CAE), was created in 2005 and remains in place until now. It gives students government-backed loans at modest interest rates, with repayment periods of as long as 20 years.

“It is a system that for many years allowed the expansion of higher education coverage, but has had many design problems both in its origin and in its implementation,” said Alvaro Ramis, rector at the Universidad Academia de Humanismo Cristiano in Santiago.

The loans outstanding had ballooned to $11.9 billion as of last year, according to state loan issuer Ingresa. Revisiting Boric’s promise could mean an impact for around 896,000 people who are in repayment and 540,000 who are in default as of Dec. 2023. The proportion of those falling behind in their payments has jumped the most during Boric’s presidency.

The program has mainly benefited students enrolled in private universities, professional institutes and technical training centers. Of the total loan beneficiaries who graduated in 2023, almost half belong to the richest quintile of young people in Chile compared to 35% the previous year.

Among those who are late on payments, however, almost 70% earn less than 750,000 Chilean pesos ($825) per month, according to preliminary 2022 figures cited by the Undersecretary of Education. The average debt per person is $7,300, according to Ingresa. The burden can be just as high for dropouts, as the payment period is reduced by half, increasing the cost of monthly installments.

“They are truly people who do not have adequate payment conditions for the credit they contracted, and that ultimately means that the cost will fall on the state and on the universities,” Ramis said.

--With assistance from Carolina Gonzalez.

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