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Sweden: Government Proposes Raising Student Loan Interest Rate

On October 31, 2021, the Swedish government tasked the Swedish Board of Student Finance (Centrala Studiestödsnämnden, CSN) with creating a new model to calculate the interest rate on all student loans taken out by students in Sweden after 1989. The CSN is a government agency responsible for managing Swedish student finance — that is, providing grants and loans for studies and collecting loan repayments. The current interest rate would be raised so that state profits from collecting interest on the loans would cover any credit losses ( kreditförluster ) that the state suffers when student loans are not repaid as agreed. In addition, the revenue from the increased interest would also fund a new program to provide employed individuals with funding to attend university. The proposal to amend the interest rate is currently part of the government’s 2022 budget proposal . Background to the Interest Rate Proposal In 2016, after learning that the CSN had had difficulty in collecting student loan repayments, the government tasked the CSN with surveying and analyzing the problem. The CSN determined that the most common reason for nonpayment is that the borrower was residing abroad, with 93.6% of people residing in Sweden making payments on their loans compared to 70.3% of people residing abroad. In 2018, the CSN reported that 13 billion Swedish kronor (SEK) (about US$1.5 billion) was currently owed by persons living abroad. In total, the government estimates that 10% of all student loans will never be repaid. Swedish law allows the state to collect unpaid student debts by garnishing wages, and seizing property. However, not all student loans can be repaid — for example, student loans outstanding at the time of death are not enforceable against the estate and are written off, and loans not repaid because collection was not possible (e.g., when the domicile of the borrower is unknown) are currently born by the state as a credit loss. The increased interest rate would cover the annual credit loss of SEK2 billion (about US$230 million) that is currently listed in the national budget for 2021 as a cost to the government. As part of its assignment, the CSN will estimate how much more income the state can expect to collect annually from the interest rate increase. In accordance with the proposal, the state plans to collect about SEK2 billion annually following the changes, compared to SEK33 million (about US$3.8 million) as budgeted in 2021. The repayment of student loans is regulated in Chapter 4 of the Student Support Act ( Studestödslagen (SFS 1999:1395) ). As stipulated in Section 1 of Chapter 4, the government sets the interest rate on student loans annually. Currently the interest rate calculation is based on the average of the three most recent years’ annual deposit rate ( inlåningsränta ). The CSN would determine the new way to calculate the interest rate with the goal of raising the total interest to 0.5%, a tenfold increase from 0.05% in 2021 . Because student loans are not eligible for the current 30% tax deduction that other loans are eligible for, the new calculation would also include a 30% reduction on the raised amount. While Section 3 of Chapter 4 of the act requires students to start repaying their loans six months after they stop receiving loan payments, individuals may request that repayments be paused because of low income, but the unpaid interest is then added to the loan sum. To offset the immediate cost of the increased interest rate, the government has instructed the CSN to create a way for lenders to choose to repay their loans over a longer period than is currently allowed. The Swedish Confederation of Professional Associations has criticized the proposal for increasing the cost of education and thus possibly disincentivizing students from pursuing university studies. Citing the OECD Education at a Glance 2021 report , the confederation claims that Sweden is already one of the countries in the world where a university education is the least profitable to the individual. Others also criticize moving the credit risks associated with defaulted borrowers from the state to those student loan borrowers who do repay their loans. The CSN must deliver its final report by April 2022. The government intends for the new interest rate to enter into force in 2023.

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