We pay little attention to plenty of global evidence suggesting that the grant-in-aid system is the most economical, least risky, and least stressful mode of financing education, including higher education
As students during the 1970s and 1980s, we were taught about the severity of the problem of rural indebtedness. We did not realise that there would come a day when students would become as indebted and vulnerable, not to the proverbial shylock but to the organised financial sector. Official statistics inform that the outstanding education loan amount in India by March 2020 had reached Rs 84,327 crore and was rising. The education loan disbursement in the country increased by 3.3% in FY20 as compared to FY19, with disbursements amounting to Rs 20,350 crore. Educational loan offtake has been declining lately. In 2020-21, the educational loan disbursement declined to Rs 18,350.83 crore and further to Rs 17,715.33 crore in 2021-22.
The data also reveals that students behave quite sincerely as the recovery rate on educational loans is 90%. According to the Indian Banks’ Association (IBA), the default rate for education loans in India increased from 7.67% in March 2019 to 9.73% in March 2020. Yet another official report indicates that the highest amount of non-performing assets (NPAs) in the banking sector was from education loans, which, in 2018, stood at Rs 6,336 crore.
The cost of higher education in India has been rising at an alarming rate, making it difficult for students from low-income families to pursue the same. The cost of tuition fees, accommodation, and other expenses associated with higher education can be prohibitively expensive, leaving many students with no other option but to take loans.
This compels students to get their higher education financed. While education loans are supposed to be readily available from financial institutions, most private banks have been reluctant. The burden has largely come on the PSBs, which are often pressed by the government to give such loans on priority. Another factor behind educational indebtedness is the lack of adequate financial assistance from the government. There are scholarship schemes and grants to help students from economically weaker sections, but these are grossly short of providing full financial support.
Furthermore, the high interest rates charged by financial institutions on education loans also contribute to the problem. These high interest rates can make it difficult for students to repay their loans, particularly if they are unable to secure a well-paying job after graduation. This can leave them with significant debt, affecting their financial stability as well as limiting their career options and future prospects.
Notwithstanding the Credit Guarantee Fund for Student Educational Loan (CGFSEL), which guarantees educational loans up to Rs 7.5 lakh per student, RBI guidelines that such loans be given without insistence on collateral, and the Educational Loan Interest Subsidy Schemes (ELISS), interest rates on educational loans are quite high. A survey by Forbes indicates that in February 2023, the interest chargeable on education loans ranges from 8.25-17.5%.
Contrary to the conventional wisdom that borrowing is a bane, contemporary literature on finance promotes borrowing as a means of maximising return. The discourse on this aspect of financing is technically labelled as financial leverage. But borrowing works only if the rate of return on investment made by the borrowed funds is higher than the rate of interest payable and terms of payments of the borrowed funds. Is leverage effective in the case of educational loans? The evidence so far has not been very encouraging. There is imminent danger that students would crumble and NPAs on account of educational loans would mount impelling the government to resort to loan waivers.
The root cause of student indebtedness is declining public funding for education. Most of the expansion and capacity creation in higher education over the last three decades or so has come through self-financed private higher educational institutions. In the absence of any public support, they meet their operating expenditure only through student fees. Most of them develop their infrastructure through borrowing at commercial rates. As a result, the repayment of the loan and interest thereon are also recovered from student fees.
Consequently, the students are made to bear the increasing cost of higher education. As most cannot pay upfront due to affordability, they are made to afford expensive higher education by bank financing. Such deferred cost recovery has become quite popular across the world with the US being the pioneer.
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