Education loans: Financing to yield the dividend

higher education, higher education in India, education loan, higher education fees in india, IIM, IIT, NBFC, 

Jobs have always been at the helm of political and economic debates, and the recent controversy around the government trying to pull down the NSSO report on jobs earlier this year had brought this topic to the limelight again. The recently published Periodic Labour Force Survey (PLFS), released after the new government was sworn in, not only talks about unemployment levels, but also emphasises on education levels in its sample design.


Theoretically, for a large number of youth, education should have a significant bearing on one’s employment prospects. According to the All India Survey on Higher Education (AISHE) 2017-18, 36.6 million students enrolled for higher education, up from 34.2 million three years ago. More than 75% of institutions of higher education in India are private. As a result, the cost of education has been ever increasing without much of a check. Inflation in the education category has averaged about 7% since 2012, with school and college fees continuing to take a substantial share of households’ income. Exorbitant fees and donations in medical and engineering colleges are not unheard of. Even premier public institutes like the IIMs and IITs have seen a manifold increase in their fees over the last decade.

With this rising fee burden, most candidates have to depend on education loans to finance their studies. Outstanding education loans disbursed by scheduled commercial banks stood at Rs 675.5 billion at the end of fiscal 2019. These loans are designed to offer students a flexible repayment plan once they start earning (with a moratorium period), a discounted interest rate over other personal loan items, and a tax benefit on interest repayment. It may be argued that these loans allow a sense of opportunity for students to get good education. With a huge chunk of young population, increased awareness, rising aspirations of the youth and new job opportunities, one would expect the disbursement of education loans to increase.

However, according to CRIF High Mark, a credit bureau, education loan disbursals have reduced by 25% in the last four years. High NPA levels and high default rates in education loans are leading to this decline. Banks are reluctant to lend to students who are economically-disadvantaged and whose families are unable to put up a collateral, or those who, in their opinion, might not end up getting a job. Also, the ticket size of loans is increasing. This rise in ticket size can be attributed to higher education becoming costlier. With increasing fees at premier Indian institutions and increased number of students opting for higher studies outside India, the volumes in the `20-lakh-plus segment have grown by six times over the last five years. Banks are willing to fund big-ticket loans and avoid loans up to `4 lakh, which fall under priority lending and need no collateral. As reported by many bankers, these small ticket and priority sector loans record the highest number of defaults and NPAs. Public sector banks have excessive bureaucracy, documentation and formalities before they give lower-ticket loans without collateral. Most private banks have tie-ups with educational institutions and lend only to their students.

From a bank’s perspective, this makes complete business sense. But it doesn’t really bode well for the society and economy at large. With rising costs of education, the inability to access finance deprives students the opportunity to undertake higher studies. This adversely impacts the ability of the candidate to secure quality education, and, in turn, perhaps a steady stream of adequate income flow in the future. While banks are willing to fund higher-ticket loans for students going to premier institutes or going abroad, this leaves a major chunk of students at a disadvantage—leading to increase in inequality in terms of opportunity to get good education, as well as to earn good living in the future. Many NBFCs have come forth to hand out education loans, but usually they need to be backed by a collateral, which makes availing them a bit difficult for students. This might even put families of students in a tight spot who would have to pledge their family assets as a collateral to secure loans.

While willingness to pay back the loan is a necessary condition, one of the prime reasons for defaults on education loans is the inability of students to payback loans. This could be due to the inability to secure a job, or even if one secures a job, the inability to secure an adequately-paying job. Salaries for students graduating haven’t kept pace with increased cost of education. The employability of Indian students has been questioned in multiple reports and commentaries. According to AISHE 2017-18, 36.4% of undergraduate students enrol for arts, humanities, social sciences, which, anyway, have not been able to command the necessary traction in our social as well as professional circles. Around 31% enrol for science, and engineering & technology. According to Aspiring Minds, the talent evaluation company, over 80% of the engineering graduates are unemployable for any job in the knowledge economy. Many industry veterans, too, have voiced their concerns over the skill and employability of Indian engineering graduates.

This leads us to a vicious circle—high cost of education, poor access to finance to fund higher education, poor employability, inadequately paying jobs, defaults on education loans, reluctance by banks to advance education loans. All this can be effectively dealt with by improving standards and quality of Indian education. The draft National Education Policy 2019 does well in identifying the major problems and challenges with higher education in India. If the education undertaken can ensure a well-paying job to students, banks would be more than willing to lend money to them without the fear of default. This will result in reduction in NPAs, and banks will be more willing to lend to a wide spectrum of students. Easy access to finance education will go a long way in making the most of our asset—the demographic dividend.