Incentives for Default Created

Lending under the CSLP involves a complicated partnership among the federal government, the provincial governments, postsecondary schools, and the lending institutions. This situation is in stark contrast to the simpler relationship between private borrowers and lenders. The complexity of the CSLP partnership, as it evolved in the thirty years prior to the 1995 risk-sharing agreement, resulted in a long
list of program rules that govern the rights and obligations of each of the
parties to the loan.
Four kinds of rules were potentially important in affecting default rates:
(1) eligibility rules that determined how much students are
allowed to borrow;
(2) rules determining the diligence with which banks
sought repayment;
(3) rules influencing the extent to which banks
allowed flexibility in repayment; and
(4) rules that specify the
consequences of default for the defaulting students.

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