Credit Scoring Model For Student Loans Essay

Credit Scoring Model For Student Loans Essay

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Introduction
Credit scoring models play a crucial role in identification, determination and quantifying risk measures for all financial institutions, particularly credit risk at both counterparty and transaction levels, for example, corporations, small businesses and private individuals (Sabato, 2010).
The shift in education policies by most countries has evolved over time from grants and scholarships provided to limited, well-achieving students to more opportunities for all in the form of student loans (Woodhall, 1998). Granting student loans is a huge task for financial institutions as they are more diverse than normal retail loans such as credit cards, personal loans and mortgages. Starting with the determinants for granting loans to the reasons for defaults, student loans could be more complex to understand and analyze for these financial institutions such as banks.
Research on the ultimate credit scoring model for student loans has yielded limited results with seemingly outdated statistics as compared to other retail credits. This research paper strives to understand the concepts of credit scoring models, analyze the link of student loans to credit scoring and to critically analyze what can be done in the future with regard to credit scoring models for student loans, particularly focusing on the variables that should be included in the credit scoring models for student loans. The report will evaluate the past journal papers, text books and other researches previously conducted on these topics and will then identify and explore the research gap and define the scope of how credit scoring models should be different for student loans in terms of variables used in the models, then a brief explanation of research methodology and...


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...s, moral suasion and baring access to further credits were suggested to be used as methods to prevent default. But they are not employed in practise. In fact, it has come to be regarded as a norm and socially acceptable in developing countries to default on student loans. It is even more difficult to track students in developing countries, which augments administrative costs even further. For instance, the default rates are higher in developing countries like Philippines than in more developed countries like Japan (Shen and Ziderman, 2009). In addition, Woodhall stated that there is lack of accurate data and the issue of ‘extended family’ which makes determination factors less reliable (Woodhall, 1988). This is particularly disturbing for the financial industry and retail credit industry because default rates cripple the whole industry and thereby, the whole economy.

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