After Farm Loan Waivers, Will Education Loan Waivers Spoil Us? Not If We Mend Our Ways

Student debt in the United States (US) has reached gigantic levels, so much so that it is now the second-biggest consumer debt category after house mortgage – as reported by Forbes earlier this year.

Consider these astounding figures from the report; the total student loan debt stands at $1.3 trillion from over 44 million borrowers, with average student loan debt climbing to $37,172 (Class of 2016). Understandably, it’s no more a financial problem and has morphed into a political issue as well with socialist democrats like Bernie Sanders clamouring to make college tuition-free for everyone.

In India, it’s a non-issue. At least so far. But the debt numbers are getting bigger and in some years, we will have a major problem on our hands if we fail to address it today. The PTI reported on Saturday (23 December) that education loans have also started bleeding the banking sector as the default in repayment has risen to “7.67 per cent of the outstanding amount at March-end, 2017 from 5.7 per cent two years ago”. The total outstanding education loan, according to Indian Banks Association (IBA), at the end of the fiscal year 2016-17 was Rs 67,678.5 crore, of which Rs 5,191.72 crore has turned bad.

The numbers are starting to scare the banks and may even become a political issue in the coming years. However, we are far off from what the situation is in the US. That’s primarily because higher education penetration is still very low in India as compared to the US. Also, parents here almost always prefer to pay for their kids’ college education instead of allowing them to take the loan route. And they can very much afford it. Until recently, access to higher education was limited to the upper classes, who didn’t need to take loans to send their kids to college. In the last 15 years, we have seen significant supply push, especially in engineering college seats. Now, even students from lower classes can attend (the quality of the supply is a different matter altogether). A majority of them must have taken loans to finance their education. Thus, universalisation of the engineering degree and rise in education loans can’t just be a mere coincidence.

The evidence corroborates this theory. First, 61.6 per cent of those who take education loans pursue engineering courses. Second, All India Debt and Investment Survey reveals that among the lowest 20 per cent of urban households, around 26 per cent of their debt is for educational purposes! But rural figures are still very low; only 4.25 per cent debt of lowest 20 per cent rural households is taken for education.

The idea of education loans was first introduced by Atal Behari Vajpayee’s government. Announcing the scheme, the then finance minister Yashwant Sinha in his 2001 budget speech had said:

In a special article for the Economic and Political Weekly (EPW), Jayadev M provided a thorough analysis of education loans. He writes that in 2004, the scheme got a leg up when, to encourage banks to distribute educational loans, the Reserve Bank of India (RBI) classified disbursements up to Rs 10 lakh for studies in India and Rs 20 lakh for studies abroad as priority sector advances. In 2009, the scheme got another fillip when the centre introduced an interest subsidy scheme where the union government would bear the interest amount charged during the study and moratorium period (one year) for all borrowers whose parental income was less than Rs 4.5 lakh per annum. This was a big boost. At the same time, supply in higher education (led overwhelmingly by engineering) was rocketing. No wonder then that education loans also ballooned.

As Jaydev tells us, the number of education loan borrowers almost doubled from 13 lakh to 25.6 lakh in six years from 2008 to 2014, clocking an annual growth rate of 12 per cent. During this period, the amount of education loans disbursed almost tripled from Rs 19.8 thousand crore to Rs 55.1 thousand crore at a compound annual growth rate (CAGR) of 19 per cent (3.4 per cent of total priority sector loans).

Here are some major findings pointed out by Jayadev in the EPW paper:

1. Almost 10 per cent of the students pursuing higher studies fund their education via loans.
2. Among the lowest 20 per cent urban households, around 26 per cent of their debt is for educational purposes while the same figure for lowest 20 per cent rural households is 4.25 per cent.
3. 35 per cent of women candidates took education loans while their enrollment ratio in higher education was merely 22 per cent.
4. Although the outstanding amount on education loan is increasing, the number of new account holders is not growing significantly, showing fall in enthusiasm, probably both from banks and candidates.
5. The share of private banks in the sector has increased from 3.17 per cent to 9.77 per cent over a period of five years.
6. 90 per cent of borrowers have availed an amount less than Rs 4 lakh.
7. Collateral-free loans, which are mostly availed by students admitted through merit, are charged a higher premium than collateral ones, which are availed by students securing admission through a management quota. This doesn’t seem fair to comparatively bright students who are more likely to get employed.
8. 47.49 per cent of the students from Kerala take education loans – highest in the country. Tamil Nadu (19.88 per cent) is a distant second, closely followed by Puducherry (15.68 per cent). Figures for the rest of the states are in single digits.
9. OBC (other backward class) share of enrollment in higher education is 32.40 per cent, but as many as 41 per cent of the total students enrolled took education loans.
10. The percentage of SC/ST beneficiaries is low (6 per cent and 1 per cent respectively) compared to their enrollment (12.2 per cent and 4.4 per cent respectively). Similarly, in 2013-14, the proportion of Muslims availing interest subsidy was 5.27 per cent (enrollment – 4.47 per cent) while the same figure for Christians was 8.79 per cent. One major reason for these low figures could be their participation in other exclusive minority-oriented and SC/ST-focused scholarship and loan schemes run by the centre, which are more lucrative.

All of these stated figures show tremendous success of the scheme, but also reveal some major challenges facing it that need to be addressed quickly.

Jayadev has pointed out three major issues that the current loan scheme grapples with.

First, the alarming rise in non-performing assets (NPAs). As a percentage of outstanding education loans, NPAs grew from 5.87 per cent in 2012 to 6.93 per cent in 2013. Also, as alluded to in the beginning, total outstanding education loan (by 2016-17 end) stands at Rs 67,678.5 crore, of which Rs 5,191.72 crore has turned bad.

The second issue is that of high repayment. In India, those who avail the loan facility have to contribute a significant amount of their income towards repayment of the loans. As much as 30-35 per cent of a candidate’s starting salary goes towards loan repayment while in many countries it is not more than 10 per cent. High repayment burden in India is mainly due to two factors, as Jayadev points out: low starting salaries and high interest rates.

Third, the vicious cycle of low entry barrier into undergraduate courses and the high attrition rate. Getting a degree, being a fad these days, and an abundant supply of seats have made sure that everyone who wants to pursue higher education can do so provided they have the money to pay the fees. A significant proportion of those who get admitted then find it hard to make it to final year. Those who do manage to do it have very few skills and struggle to get a job. Why are we then surprised by high loan defaults?

To nip these problems in the bud, Jayadev suggests some changes in the structure of the loan scheme.

First, to reduce repayment burden, he bats for introducing an income-contingent loan scheme instead of the current fixed repayment loans. Under the latter, the quantum of interest charged is linked with the bank’s prime (or base) rate while under the former, repayment is based on a fixed percentage of the candidate’s individual income.

Second, he suggests increasing the moratorium period from one year (after completing the degree) to two years and an option where a candidate can pay a low interest if their salary is low.

Third, he recommends streamlining various education loan schemes run by the states and centre and also income certificates under one platform so that a candidate doesn’t benefit from multiple schemes at the same time.

Fourth, to avoid bank defaults, he recommends that the government should be the ultimate risk manager. It should make it mandatory for private academic institutions to contribute annually to the centre’s Credit Guarantee Fund for Education Loans, which aids banks in case of defaults on loan repayments. While some of Jayadev’s suggestions are debatable, he has done a comprehensive job in diagnosing the major problems with higher education loans in India.

We must get cracking on this problem before it’s too late and the situation gets out of hand. If we don’t, we risk moving towards a dangerous financial situation that the US finds itself in. Worse, apart from farm loan waivers, we will witness an era of education loan waivers. Waivers have harmed farmers the most, the same fate awaits our students (unless we correct course).