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Drive for education drives South Korean families into the red

Students took the all-important college entrance exam this week. Many households in South Korea are deeply in debt, and analysts point to high family spending on private education as a key culprit. 

By Jason StrotherContributor / November 10, 2012

A student studies for South Korea's college entrance exam at an intensive boarding school dedicated to test preparation.

Kim Hong-Ji/Reuters

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Seoul, South Korea

When Cheon Sun-kyoung and her husband took out a $100,000 loan and moved their family of three from the affordable suburbs to one of Seoul’s most affluent neighborhoods, she hoped it would be the start of the climb up South Korea’s highly competitive social ladder.

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She wanted to enroll her teenage daughter in one of the pricey after-school tutoring academies here to giver her an edge on getting into a prestigious university and, eventually, landing a high-paying job. But for now, Ms. Cheon says her family has to scrape by.

“It’s really expensive living here, I even have to buy our groceries in another, cheaper neighborhood,” Cheon, a part-time teacher, says. “It’s not possible to save any money now because we are paying off the loan we took out to get this apartment.”

Despite the efforts of the Korean government to rein them in, more and more South Korean families like the Cheons are channeling all of their disposable income into supporting their children’s education – and increasingly driving themselves into debt.

In August, the Bank of Korea released data that shows households here are facing a debt-to-income ratio around 160 percent this year, up from around 123 percent in 2010. Loans taken out from mostly secondary lenders that charge high interest rates total close to $600 billion. As of the end of July, household debt totaled $573.25 billion, according to the Bank of Korea. 

According to the LG Economic Research Institute, 28 percent of South Korean households cannot make payments on their debts each month and can’t cover their monthly expenses with their current income.

For some observers, those figures have set off alarm bells. Just ahead of the US financial crisis in 2008, Americans had a debt-to-income ratio of around 130 percent

According to the Chosun Ilbo, South Korean parents spend an average of $1,000 per child on education each monthSouth Koreans poured $19 billion into private tutoring, cram sessions, and college exam prep in 2009, more than half the sum spent on public education. Some report this spending is the number one reason Koreans are deciding to have fewer children: In 2011, South Koreans spent an estimated $17.7 billion on private education, down for the second year in a row because of Korea's declining birthrate.

Jeong Young-sik is an analyst at the Samsung Economic Research Institute in Seoul.  He estimates that 70 percent of household expenditures go toward private education. Mr. Jeong says that, thanks to a slumping real estate market, a perfect storm has been created.   

“There are myths that contribute to South Korea’s household debt problem. One is the belief that real estate prices will always go up.  Another is that education will increase a family’s social position,” he says.        

This notion of education-based social mobility became cemented into the public consciousness after the Korean War. The nation was left in ruins with few natural resources. The only way for a family to lift itself out of poverty was “human capital.” And that began with ensuring children received the best education available, no matter the sacrifice or cost.   

“Parents still want to educate their children so they can achieve better status,” Jeong says. And parents are increasingly willing to do whatever it takes for their children to do that, even if that means losing status in the short run.

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