Education loan scenario explained

Are we fast catching up with the loan-based education system?
Representational Image
Representational ImageFile/ GK

Inflation is sending shivers down the spine of one and all. Amid the rising concerns over its non-stop expanding tentacles, it’s the mounting cost of education which has been unnoticeably eating up a major portion of household budgets. Actually, education inflation is establishing a foothold as joblessness has marred the youth even after completing a particular course or degree. In this situation youth unable to find jobs in their chosen fields are compelled to pursue more courses/degrees to remain competitive. But, in reality, it not only makes the students spend more on their education, but also erodes the value of education as more degree holders lead to saturation of the job market.

Currently, education inflation seems out of the purview of the policy makers and its side effects are becoming more and more visible with every passing day. This kind of inflation has been baffling parents for quite a long time now. Check with any parent, you will hear tales of pain owing to rising cost of education right from the schooling period.

Major challenge for parents emerges when it comes to funding higher education. The situation for parents gets more complex the moment they opt for a professional course for their child. Here the burden is additional as the cost of coaching becomes inevitable. Most of the time, children opting for a particular professional course during their schooling would start pursuing a regular preparatory course. This additional preparatory course comes at a whooping cost running in lakhs of rupees. So parents are caught in a whirlpool of education expenses leading to complex financial problems.

A report reveals that a three or four year graduate degree from a government college for a student pursuing a basic course is around Rs 2,63,622 per year. For professional courses like the much sought-after engineering and medicine streams, the fees veer upward to approximately Rs 6,23,107 per year. Elite management institutions like IIM (or any other private university in the country offering a management course) charge between Rs 8-Rs 23 lakh. However, the education expenses in private colleges and universities are skyrocketing for varied higher courses, especially engineering and medicine courses.

It is here that the banks come into play to bridge the financial gap of households through their education loan schemes to fund study expenses of students. The rising cost of education and the urge of parents to facilitate the best of the higher courses to their wards are fast changing the education landscape into a loan-based system, at least in the higher studies category. The changing pattern of the system rests on the assumption that after completing the higher education, the student borrower would get lucrative jobs with steady income and repay their loans. However, these assumptions remain hypothetical and after completing their degrees joblessness becomes a companion for most of the student borrowers. Millions of such students stand pushed into a debt that they have been carrying now for years.

The joblessness of the student borrowers has directly impacted the banks as there is increasing default in the repayment of education loans. A recent data reveals high defaults of about 8 per cent in the education loan portfolio of the banks. Non-performing assets (NPAs) in this category of loans including public sector banks’ (PSBs) were 7.82 per cent at the end of June quarter of the current financial year. As per the Report on Trend and Progress of Banking in India 2020-21 by the RBI, the outstanding education loans of all banks increased to Rs 82,723 crore as of March 25, 2022 from Rs 78,823 crore as of March 2021.

This sharp increase in non-performing assets (NPA) in education loans is a matter of concern, as it could hamper the growth of bank credit for higher education in the country, according to an occasional paper published by RBI. In fact, banks have already started exercising caution while sanctioning education loans. In the given situation, genuine cases are overlooked by the banks and there are delays in sanctioning the loans.

Default in education loans is not only stressful for the bankers, it is also loaded with a possibility of ruining the career of student borrowers, especially when they are chased by the lenders for repayment. Actually, there are two difficult situations in education loan default. One, after completing their course and enjoying a moratorium period (repayment holiday) majority of the student borrowers have remained unemployed. Thus, with no income earnings to deposit their monthly equated installments (EMIs) they have turned defaulters. Two, there’s a section of student borrowers who have landed in some job after completing their studies, but find it difficult to pay the EMI fully as their earning doesn’t match the repayment liability and their personal day to day needs. Resultantly, the debt has left them in acute mental stress. Not only this, the defaulting students are now facing the risk of facing credit constraints from banks and financial institutions in their future endeavours.

We should also not overlook the fact that with the burden of loans on their shoulders, the majority of the students could face severe psychological pressures, affecting their performance both during studies and while on job. This burden adversely impacts the attitude of students and of society as a whole with dangerous implications not only for the development of education, but also for the very social fabric and on the whole nation’s development.

Meanwhile, this problem of growing education loan defaults needs serious attention. It’s as good as a shameful blot on the higher education system, which unfortunately produces degreed liabilities more than employable young force. It’s of utmost importance to peep into the affairs which act as the drivers in increasing education loan defaults. Otherwise, it’s going to be a tsunami which has the capacity to ruin the potential of our talented educated youth.

However, there are a few important things to consider for the students before availing education loan facility. Of course, access to education loans is easier as compared to other forms of loans. But its repayment can be more stressful. Since these loans come with a repayment holiday which includes a course period and some more months after completing the course, the student/parent borrowers should use this moratorium period for saving a portion. Out of this saving, they can later on fund their EMIs. It would also be better to repay the interest portion on a monthly basis. They would avoid accumulation of their loan amount at the end of repayment holiday and would also earn rebate on interest rate. Subsequently, EMI will also reduce.

Remember, a default spoils the credit score of both the student and parents (usually co-borrower). If EMIs are not paid on time, the bank classifies the loan as a non-performing asset (NPA). This will have an adverse impact on the credit history of the student and he/she will face difficulty in accessing other loan facilities in future. So, a repayment strategy in place before EMIs start is a must. If possible, the entire loan amount should not be taken in one go, but in instalments. This will reduce the interest burden.

Last but not the least, the education loan borrowers should not hesitate to share their difficulties with the bank if they face financial constraints. Maybe the bank gets convinced to reschedule the loan repayment or there is a possibility that the bank would tailor a financial solution to get them out of the financial mess.

Meanwhile, isn’t it possible for banks to create an education fund in deposit segment where a parent can make recurring investment with a goal to bank upon at the time of need of child’s education expenses?

(The views are of the author & not the institution he works for)

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

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