Education is expensive, especially for the student aiming for a top-class institute or a foreign course. Many don’t get the chance they deserve due to financial problems, despite being brilliant in studies. Thus, education loans were introduced in the year 2004 in the Union Budget. Since then, education loans have been an enormous help. Education loans are prioritized and should be encouraged. Attractive student loan schemes are offered all over the world. In India, a student or education loan scheme was launched to support the dreams of academically brilliant students. These loans are investments for the country’s development economically and in the future.
But since then, education loan interests are growing considerably and have become ten times the amount they were than when they were introduced. The rise in interest rates has troubled lakhs of Indian students. Today banks of India have outstanding education loans of around Rs 50,000 crores with most of the loans still under the moratorium period. In the past five years, the education loan market in India has shrunk 25%. Banks have mostly closed their doors for students seeking loans below Rs 4 lakh without collateral.
“Banks are looking at a value game. They are no longer interested in volumes,” said Parijat Garg, SVP, credit bureau CRIF Highmark.
With time, banks have slowly shifted from lending to poorer students or those whom they find risky to give a loan considering their ability to land a job. Most private banks have tied up with elite educational institutions, and they provide loans only to the students of those institutions.
Loans of Rs 4 lakhs are provided without collateral to public sector banks after completing formalities and documentation. It’s more or less a dismal scene for the less-privileged students.
WHY BANKS HAVE LIMITED LOANS?
Banks extend loans only after seeing the employment potential of the student after completion of the course. Their decision is also based on the repayment capacity of the student. However, if the student is unable to repay the loans due to market down or any unforeseen situation in that student’s life, the lender may consider extending the repayment period. Usually, loans on education are provided for up to five to seven years maximum. However, for loans up to Rs 7.5 lakh, the tenure can be extended up to 10 years as per the guidelines while 15 years for loans above it.
“The commencement of repayment will be shifted to six months from employment or one year of completion of the course, whichever is earlier, without treating the change as restructuring,” says Ravishankar, general manager planning and development of Lakshmi Vilas Bank.
However, the ease in rules and regulations with time have made anyone eligible for taking loans for a legitimate admission in a course, irrespective of previous academic performance or process of admission.
This is consequently resulting in a high rate of defaulters in education loans. Many borrowers are not succeeding in landing a job within one year. In other cases, the salaries of the students are not sufficient enough to meet the number of loans taken from the banks.
An increase in failures in education is paving a more concrete path for aggravating the situation creating a large number of overdue loans. Besides, students who are getting well-paid jobs are not paying the amount too. Reports show that loans sanctioned without collateral security or a third party guarantor have higher default cases. Banks are facing significant issues in tracking down the beneficiaries after their course completion.
“The rate of defaults has slowed down. We aren’t operating at the earlier speed we used to — we’re using data analytics and forensics for prudent lending”– says an SEO of a Bank.
CONSEQUENCES EQUAL TO INCREASING PROBLEMS
So far, borrowing was relatively hassle-free. But there has been a gradual increase in the outstanding education loan amount in India.
Due to the default students, the Government has taken precautionary measures that safeguard the money of the bank. It ensures the formation of a credit guarantee fund under which the banks will be guaranteed 75% of the loan amount in case a student defaults.
However, this is applicable only for loans up to Rs 7.5 lakh with no guarantee of a third-party.
The banks are raising the shield as well. This means more strictness in the eligibility criteria for borrowers. The Indian Banking Association (IBA) has set up an expert committee to alter the scheme of the education loan system. It brings forth a rating system for colleges and institutions that will be based on things like the reputation and placement records of the colleges.
This result in getting a loan quickly for an MBA from the IIMs whereas getting the same funds for the same degree from not so reputed institutes will be extremely difficult.
India, with a vast population, has an enormous number of academically brilliant students. Limited seats in top tier colleges and universities will result in the admission of numerous bright students in second-tier colleges. This division of colleges in providing loans will be majorly unfair to many.
Negative Aspects of Education Loans
- When a student decides to withdraw the loan, the bank/financial institution charges a fee. This cancellation fee is accompanied by a few other payments and penalties, which may be hard for the middle-economic class students.
- A good academic report in school plays an integral part in getting loans from banks. There can be plenty of intelligent students who are poor academically only.
- Students are restricted from switching your course in the middle of your journey. This owes to the fact that an education loan is sanctioned for a particular course at a time. So when you think to change your course, it may not be possible.
- A student is also not granted loans that do not guarantee much employment rate. So banks do refuse a loan to a student wanting to go by his/her choice of taking admission in some mere degree course.
- Education loans’ skyrocketing interest rates are the primary cause of concern which is making students take steps back when the time comes for them to go for a loan.
Not everything is black and white. Thus said, an enhancement is much needed in the loan system in India, which will safeguard the bank’s money and also provide equal facilities to the deserving ones.
Students generally go to Non-Banking Financial Corporations (NBFCs) for getting loans without collateral in India since only a few banks provide them without collateral. One of the prime benefits of getting a loan from foreign countries is lower interest rates.
Higher education demands for a higher amount of money. Thus, students have to go for higher education loans. Unlike India, foreign countries like Australia, Germany, Mexico has student-friendly loan policies. No wonder why collateral-based study abroad is much more beneficial for students and the number of Indians going for that is increasing rapidly. They are termed as ‘Secured Loans’. These loans provide financial security to both the parties (i.e. the student and the bank). They also focus on securing the financial burden of the students, unlike the unsecured education loan which India carries.
In India, the interest rates of education loans from private banks are very high. HDFC Bank has an interest rate of 12% and above while Axis Bank has rates as high as 15% p.a. for 4 lakhs. The SBI has rates varying from 11.75% to 13.50% p.a.
The scenarios in other countries are quite different compared to India. The HECS-HELP scheme in Australia has a repayment of loans only when the students’ income has the potential to repay. The repayment is also on the supplementary taxes. In New Zealand, a resident is not charged with any interest rates for the loans he/she borrows. They need to repay only when they have a minimum income to sustain life. USA has the Income-based repayment (IBR) policy which allows the student not to pay back on how much they owe, rather on how much they earn. The interest rate in the U.S. ranges from 3.75% APR to 8.75% APR.
Brilliant mastermind students of India are shifting to foreign countries for better education loan facilities and it is quite concerning. These students are the seeds of a growing nation due to bad education loan policies getting to other nations. Why do we the Indian students would be put under higher interest rates where any form of education is still a dream of millions? A major improvement is required and the interest rates are to be looked upon as it is a soil where harnessing education is necessary on a larger scale.