Graduation Day: A Diploma to Frame and Debts to Pay

A survey by TheMarker finds that a third of young Israelis have taken out loans to help pay for their studies, leaving them with a financial burden as they start out on their adult lives.

Eliyahu Hershkovitz

Maya (not her real name) is a 26-year-old student from Tel Aviv. She is just finishing her second year of nursing studies, and lives in south Tel Aviv by choice. By living there, she qualifies for a housing grant from the city. Even though Maya works and gets financial help from her parents, and even though tuition at the universities in Israel is very low compared to most American universities and lower than at private Israeli colleges, she still needs student loans in order to live.  

Maya rolls over her loans every few months. “I have a loan of 10,000 shekels ($2,920) that I increased not long ago,” she relates. “Sometimes there were periods that my debts reached 20,000 shekels, and then I paid back a certain sum all at once. I have two more years to study, so I’ll need to live with the loans for at least two more years, since I will get a normal income only after I start working as a nurse.”

Assaf, 32, is juggling multiple loans to get his degree in government from a college in the center of the country. “I have three annual loans from the college to pay for tuition – each of 5,000 shekels – which I’ve yet to start repaying. Together that’s 15,000 shekels. I’ve already completed my academic requirements, but I have a debt of 4,000 shekels to the college, and without paying it I can’t graduate. In addition, I have a loan of 30,000 shekels from the bank, which I refinance all the time.”

In addition, he has another high-interest loan, from the credit card company Isracard, that he took out during his studies, as well as a debt of about 20,000 shekels from a business he tried to set up with friends. “But that is not burdening me at the moment, so I don’t count it,” he says.

All told, he is paying back about 1,700 shekels of debt a month – some 30% to 35% of his monthly income. When he starts to repay his debts to the college, the amount will grow to some 2,100 shekels. One of the reasons he took on so much debt is because his parents could not help him pay for his studies, he says.

Unlike many countries, Israel has no data concerning the debts of young people without children: Neither the Bank of Israel nor the Finance Ministry knows how much debt young people have, their ability to repay it or whether the situation is growing worse. But the situation of Maya and Assaf is not unique. As in many other developed economies, the steep rise in the cost of higher education and the cost of living mean that many young people – especially those who don’t receive help from their parents – must take out loans. Sometimes, as in Assaf’s case, they are paying back more than one loan at the same time.

A survey conducted for TheMarker by the Panels research firm sheds some light on the debt burden of Israeli students. More than a third of all students in Israel have taken out loans to finance their studies. Of these, almost two thirds took out a loan to pay tuition costs, and 26% borrow to cover their living expenses. Some 70% have debts of over 10,000 shekels, and 33% owe more than 20,000 shekels. Fully 25% have an overdraft at the bank; 21% have other loans in addition to the ones they took out for their studies; 12% owe money on their credit cards; and 19% also have other debts. The vast majority also work, at least part-time, sometimes full-time, in addition to their studies.

Most are paying back less than 1,000 shekels a month, but 27% pay over 1,000 shekels every month. Almost 7% pay over 2,000 shekels a month. Almost half use over a quarter of their monthly income to pay back their loans, and 15% spend over half their income on paying back loans. In most cases, these are short-term loans. Two thirds are for no more than three years. This is a much better situation than for most students in the United States, who often reach middle age before managing to pay off their student loans. But for many Israeli students, these loans are rolled over and refinanced frequently, so the statistics are a bit misleading.

“The only way I can see myself getting out of this loop is an exit [selling off a business] or starting a business and succeeding. But building a business can also push you even deeper into debt, as happened to me,” says Assaf.

Maya accepts responsibility for her situation, noting, “I live in Tel Aviv, and it’s not cheap even in the south of the city.” She says she needs to be more frugal, and should probably take a course in managing her finances. “I don’t know what ‘interest plus prime’ is. When I’m at the bank, I always tell the clerk, ‘Explain it to me like a child,’ since I have no clue what she’s talking about.”

Maya says part of the problem is she never received any financial education, and it is beginning to worry her. “I panicked a number of times over the size of my debts. I am lucky I have parents who can support me, to a limited extent,” she says.

In the United States, where aggregate student debt has reached $1.2 trillion, the issue has long been considered a financial time bomb. Americans graduating from college this year left campus with an average of $33,000 of debt, up from $26,600 three years ago and double what it was two decades ago. As of 2012, 43% of Americans under the age of 25 had student loans, compared with just 25% in 2003. And the rising cost of tuition in the United States has meant that, this year, 70% of bachelor’s degree students graduated with debt.

The problem is not limited to the United States. In Britain, 2013 university graduates earned 12% less on average than graduates who finished before the global financial crisis that erupted in 2008, but their student loans were 60% higher. The average British student currently graduates with debt of 44,000 pounds (about $75,000), says The Sutton Trust, which promotes access to higher education. That’s more than the average American student, with steep tuition hikes in Britain a primary cause.

Unprecedented level of debt

In a development that is unlikely to be copied elsewhere, in May students at a for-profit private university in Chile were informed via a YouTube video that records of their student debts had literally been wiped out by artist Francisco Tapia, who reportedly broke into university offices and burned student loan documentation. The university still has recourse, however, to sue the students for their outstanding tuition bills.

Those figures from the Panels survey show Israeli students are much less indebted than their peers in the United States or Britain. Israel is different not only because the average Israeli’s debts – the ratio household debt to gross domestic product – is low, but also because so many young people have served in the military and are entitled to a demobilization grant ranging from 5,430 shekels to 11,800 shekels, depending on duration of service and whether they served in a combat unit.

Moreover, tuition at Israeli universities remains low by U.S. standards. The level varies based on the degree a student is pursuing, but tuition for a BA program at public universities in this academic year was 10,198 shekels (or roughly $3,000 a year). A private college’s rate can be double that, or more.

Yet in spite of the low rate of debt in Israel, Israelis are accumulating an unprecedented level of student debt, which threatens to makes it more difficult for them to establish a firm financial base as they start careers and families. Their lives might be shaped by the extent of their debt, in some cases leading to putting off starting a family, buying an apartment or even a car.

Uriel Lederberg, who heads Paamonim – a nonprofit that helps Israelis facing financial problems and poverty – says that despite the financial aid available through the colleges and the army, a considerable number of young people seek assistance from his organization due to student debts they have racked up.

“It’s very easy now to take out a loan,” he says. “You make one phone call to your bank or other banks, or to other lenders or credit card or insurance companies. Fortunately, the vast majority of the debts can still be dealt with – 50,000 to 60,000 shekels, and not hundreds of thousands of shekels.”

Some of those contacting Paamonim are young people who have tried to open businesses and failed. The plethora of high-tech startups started by people in their twenties and early thirties has created a myth that it is easy for young people to make money. But some, he says, are too adventurous.

Tomer Appelbaum