What is up with Student Loans in India? - Raunaq Shah

The National Education Policy (NEP), released earlier this year, was the talk of the town for a couple of weeks following its approval by the Union Cabinet. Criticized and condemned by pundits in roughly equal parts, the policy aims to make India a global knowledge superpower. It includes many industry changing reforms such as increasing the Gross Enrolment Ratio in higher education from 26.3% to 50% by 2035, having at least one large multidisciplinary institution in or near every district by 2030, and providing multiple exit options for an undergraduate degree of 3 to 4 years, etc.

One aspect that was surprisingly missing from the NEP 2020 was education loans. The policy did stipulate for expanding the National Scholarship Portal and encouraging high education institutes to provide scholarships to their students, but on the pertinent scope of education loans, there has been no mention.

Contrary to popular belief, the education loan market in India is quite large. The western concept of children paying for their own education is alien to parents in India and families usually bear this burden. Wealthier families generally have the means to pay for educational expenses themselves or may take loans for the same. The problem arises when we realize that a large part of the population cannot afford this, but at the same time do not enjoy the elaborate loan mechanisms set out in the west.

People also seem to assume that the expenses of a higher education are not that much in India. This is partly true, tuition costs in India are some of the lowest world-wide but people forget that tuition is only a part of the expenses that students generate. There are accommodation costs, utility, and just general living expenses that are virtually impossible for a full-time student without an income to afford, especially if they come from a low-income background.

Additionally, majority of Indian students study at private universities which do not share the affordability of their public counterparts. According to the HRD Ministry, 78% of Indian colleges are privately owned and cater to 67% of all students. Another discerning factor is that not every field of study has the same fee structure. For instance, fields like engineering, and management are considerably more expensive than liberal arts or vocational studies. Perhaps the largest cost of education for a student from a low-income background in India is the opportunity cost. If they are not in college, they are most probably working a blue-collar job and contributing to their family’s income. This is a detail most often overlooked. Such a student will have to look to replace a salary in addition to fund their education. The constant pressure of an education loan on top of this would just disincentivize them from pursuing a higher education.

This is not to say that all is bad. The government has tried to create policies that allow students some help with education loans. Under the Model Education Loan Scheme of Indian Banks’ Association (IBA), a student could get a collateral-free loan of up to Rs 7.5 lakh, and banks even offer a 6-month moratorium period after completion of the course to allow students to find jobs. While this may look very free-handed and pragmatic, it is important to know that interest rates average around 11% which is higher than most auto-loans.

Additionally, it is quite cumbersome to get these loans. If a student has a bad academic record, their application is most likely rejected. Banks carefully factor the course and institution into account. Students will most likely be rejected for a loan if a course is deemed to not be worthy of study or the institution is not accredited. For example if a student wants to study graphic design, a career with a lot of uncertainty and struggle for the first few years at least, it would be highly unlikely for a bank to offer them a loan.

Source : collegedunia.com

The graph above shows the fluctuation in fees across fields from the top public universities in India. These institutions are some of the hardest to get into from an academic perspective. It makes sense for fees to be structured like this from a university’s point of view, but that makes it increasingly difficult for the students to secure a way of financing their education.

Additionally, the procedure and documentation required for a loan are quite complex and may be overbearing for an 18 year old student.. Most students are not aware of the time value of money and what repercussions a high interest loan could hold for their future. Defaults on unsecured loans mean that banks can sell your debt to collection agencies that use very aggressive tactics to recover the amount. Further, while it is illegal for debt collectors to use scare tactics, everything from derogatory language to blackmail is employed to recover the debt. Most importantly, a debt such as an unpaid loan is a huge mark on a person’s credit score. Losing financial credibility at such a young age does not bode well for anybody as getting loans and credit cards may be improbable.

Unsecured education loans seem like they are a lot more trouble than they are worth and is probably no one’s ideal path to an education. However, it would not be fair to say that the banks are completely at fault.

Source: Times of India

The education loan market itself is significant, estimated to be at Rs 22,250 cr in FY19, growing by 34% compared to FY16.However, this is only the disbursed value. The number of loans has actually gone down by 25% in the last 5 years. This is due to the high level of non-performing assets (NPA) i.e. in this case a loan that cannot be repaid. The level of NPA’s in education loans is 11%. When compared to the NPA rate of auto loans, which is at a meagre 2% as of September 2019, it is easy to see the severity of the situation. This drastic difference is due to multiple reasons, most of which have been mentioned above as struggles students face in paying off such loans.

Another significant reason is the nature of unsecured loans. For example, auto loans are secured loans i.e. you must provide the bank with collateral which they can use as payment in case you cannot pay off the loan. With auto loans, the collateral is usually the car itself. A bank can and will recover the debt by taking away your car. No one wants their assets to be taken away, hence most secured loans are honoured. In the case of unsecured loans, the bank will simply sell your debt to a collector who will then be charged with recovering your debt and in the short run a bad credit score is a far more lenient punishment compared to the loss of an asset. Thus, it is no surprise that education loans have such a high NPA rate. For banks it is a natural course of action to raise interest rates and be strict in their lending.

All in all, the system of education loans in India seems like it does not help any of the parties involved and is in desperate need of reform. However, until then there are a few alternate paths for students to fund their education.

FinTechs like StuCred and VestEdu offer students great alternatives to education loans. StuCred provides students with short-term loans at no interest. Students can use these loans during financial emergencies or to simply pay rent, etc and can pay off the loan anytime within 30 days. Not only does this allow students to have instant money but also to raise their credit score by paying the loans off early. VestEdu uses peer-to-peer lending to lend students collateral-less loans at lower rates that are fixed regardless of market conditions. These loans are usually funded by alumni who are investing in the student’s future. Colleges are also starting to implement Income Share Agreements (ISAs) that allow students to borrow money from the university itself in exchange for a fixed percentage of their salary after graduation for a set number of years. ISAs are a great substitute for high-interest loans especially if your choice of profession is high paying. However, it is important to remember that the agreement is time-based, set for number of years and not dependant on the amount borrowed.

Education in India is revolutionising. The NEP 2020 has arrived at a crucial time in this change. Whether it will aid or hinder this change is yet to be seen. However, in my opinion the omission of education loans speaks poorly on its part. These solutions add a dash of optimism to the current bleak nature of education loans in India and as a student, I can only remain hopeful that it gets better from here.

About the Author: Raunaq Shah is a 22 year old student at ISME School of Management and Entrepreneurship in Mumbai. After dropping out of SUNY Geneseo where he was studying Physics, he decided on a field of study that allowed him to pursue his various multidisciplinary interests which include science, finance, and the literary arts. Raunaq is also an avid reader, musician, and an advocate for mental health awareness.

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