Over 28 million students were enrolled in various Indian undergraduate courses in 2018-2019. Despite such a large undergraduate student population, India faces a severe shortage of well-trained professionals in several fields such as medicine and business management. While there are multiple reasons for this, one of the most important is the unavailability of student loans for sufficient amount and duration.
Higher education in general, and medical education in particular, suffer from what is called the problem of “the reverse tragedy of the commons”. While society may benefit from an increased supply of qualified physicians, the costs and risks associated with obtaining this training are borne entirely by the individual. This limits both the supply of doctors and that of educational establishments wishing to train them.
From a student perspective, there are several challenges associated with paying for any form of higher education, which requires a greater level of commitment in terms of cost. With the exception of a few students whose parental or personal resources can help finance this education for them, for the rest, borrowing remains the only option.
In addition, there are cost uncertainties associated with the institution they are admitted to as well as the total costs of education, including whether they decide to pursue a higher level of university qualification. In addition, there are uncertainties related to income and associated timing that could generate very low income immediately after graduation.
All of this can result in high levels of defaults for lenders, which limits their ability and willingness to lend appropriate amounts; for appropriate durations; and at appropriate interest rates. These affect the ability of students to enroll in such higher education.
This problem is not unique to India, but is shared by several developed and developing countries. In the United States, for example, the average cohort default rate on student loans is around 10%.
The government and the Reserve Bank of India (RBI) have already taken significant steps to address these issues. Student loans of up to Rs 20 lakh are eligible for priority sector classification.
This provides a guarantee of up to 75 percent of the past due amount of unsecured education loans up to Rs. 7.5 lakh granted by registered lenders at an interest rate not exceeding 2 percent at- above the base rate.
With 29 registered lenders, all banks, the program has since its inception covered a cumulative loan amount of Rs. 15,926 crore (as of March 2020), with 78% of secured loans being in the category up to Rs. 4 lakhs. In 2019-2020, it only reached 10.11% of the annual target of 10 lakh of loans set by the NCGTC.
With some changes, CGFSEL holds the key to meeting the challenges discussed. Since the latest estimates of defaults are around 10% for India according to the State Level Bankers’ Committee, it might be possible for CGFSEL to reduce its guarantee to only 10% and offer it on the basis of a second loss, with the registered lender holding both the first loss risk (say 5%) and the residual senior risk of 85%, which will now receive a high rating.
With this approach, CGFSEL could potentially cover larger loan amounts beyond Rs 7.5 lakh (78% of guaranteed loans were in the category up to Rs 4 lakhs) as well as extend the loan maturity up to ‘at age 20, allowing students enough time to repay.
The CGFSEL could also be extended to loans issued by NBFCs. However, the interest rate cap at 2% above the base rate actually means that even expected losses were not factored in and, as World Bank researchers noted in 2018 , this is not necessarily conducive to the development of a dynamic education loan market. .
In contrast, in the United States, the interest rates charged for student loans for medical schools can be as high as 13%. This represents a spread of over 9% above the relevant risk-free rate and has been essential in ensuring that students have adequate access to well-designed loan products.
Another area worth exploring is getting medical and other colleges offering technical and vocational courses more directly involved in handling defaults. CGFSEL can register them formally, just like lenders, and with the help of an independent rating agency, publish college ratings.
The CGFSEL could also regularly publish cohort default rates on education loans by college and explore the possibility of declaring colleges with cohort default rates above a certain threshold as ineligible to participate in the guarantee scheme. In this way, students and lenders can be well informed about the performance of student cohorts of these colleges after graduation.
In the United States, for example, if cohort defect rates exceed a certain threshold, educational institutions are required to create a defect prevention task force that will prepare and implement a plan to address the defect. high default rates and prevent loss of access to federal student loans. .
For example, historically black colleges and universities (HBCUs) in the United States have taken a number of steps to ensure that their students’ defaults remain below the specified threshold. These include increasing borrower awareness of obligations, monitoring borrowers and increasing contact with defaulting borrowers.
Governments around the world have sought to intervene in student loan markets using multiple mechanisms. One approach has been to increase public spending on higher education. However, even in developed countries, to keep pace with the growing demand for higher education as well as its higher costs (and private returns), other mechanisms, such as state-guaranteed bank loans (GGBL ) and conditional loans are becoming popular.
While GGBLs are regular loans, ICLs are government funded and are a unique product in that the obligation to repay depends on the borrower’s income above a certain threshold. Once this threshold is exceeded, the repayments are billed to the borrower using the tax system, making it cost effective to administer.
It is also progressive since borrowers with lower incomes (either because they could not find a job or because they choose to work in disadvantaged areas) can potentially pay lower amounts or, if they are below the threshold, nothing.
For example, in Australia, repayment rates as a proportion of total income under its Higher Education Loans (HELP) program vary from 1% to a maximum of 10% depending on income levels.
India has already introduced GGBLs through CGFSEL. It does not yet have an ICL, although the IBA Model Education Scheme contains elements similar to that of the ICL, such as the flexibility of banks to offer moratoriums and the telescoping of repayments over the life of the loan. But given that its ID and income tax systems are improving rapidly, this may well be a strong option for the government to explore now and gradually move away from GGBLs.
There is a strong rationale for government intervention in student loan markets in general, but particularly for higher and more expensive forms of education such as in the medical field. Such intervention may take the form of efforts to help private lending markets develop deeper and more direct interventions such as income contingent lending.
âNachiket Mor is a former banker and served on the board of the Reserve Bank of India and its financial supervisory board for many years. Sowmini G. Prasad is a research associate at the Financial Systems Design Initiative, Dvara Research. The opinions expressed in the article are those of the authors.