Debt-Free Education Still a Dream 

Higher education in India requires significant financial investments, pushing many middle-class students to take education loans. However, these loans often come with high-interest rates, leading to a cycle of debt and, in some cases, loan default. Rising unemployment and heavy debt burdens contribute to declining loan recovery rates, undermining the original intent of loan schemes and programmes dedicated to supporting education.

In India’s education loan landscape, complexities arise as students grapple with loan acquisition while banks navigate defaulters through legal channels. According to the Times of India, a Tamil Nadu man sued a bank for demanding a Rs. 21 lakh loan repayment after his son’s demise, despite timely notification. In Chennai, the State Bank of India pursued a defaulter duo through civil court, finding them guilty of EMI avoidance. These cases highlight the intricate challenges and legal battles intertwined with education loans, prompting reflections on necessary reforms for equitable access to education financing. 

Both scenarios reveal distinct facets of India’s education loan system. One illustrates the strong influence of banks, while the other shows borrowers exploiting the system by defaulting on loans and avoiding repayments. 

So, is there any middle way to handle this turbulent loan ecosystem? Recently, in the USA, post-COVID outbreak, American students faced financial struggles and could not repay their loan installments. President Biden has introduced student loan forgiveness programmes in the USA that favour pandemic-driven financial constraints for Americans. Interestingly, the U.S. government has structured student loan requirements to favour students, discouraging defaulters from using them as an easy way out. Can such an effective student loan forgiveness programme help India navigate the debt structuring gap for student loans? 

Well, it would be wrong to say that the Indian government does not take measures to support higher education. Progressive steps include government-backed education loan schemes like Pradhan Mantri Vidya Lakshmi Karyakram (PMVLK), interest subsidies, scholarships and fellowships, collateral-free loans, or income-driven repayment plans. Still, education loans in India constitute the highest NPAs (non-performing assets) in the banking industry; for the first quarter of FY 2023, they stood at 7.82% with an outstanding portfolio of ₹80,000 crore. 

“Fresh job creation has not kept pace with the number of graduates coming out of the colleges, thereby adversely impacting the timely repayment of education loans.”Jyoti Prakash Gadia, Managing Director of Resurgent India

The cost of top higher education degrees like engineering and management courses, such as MBA, is skyrocketing, driving more students to take out loans from private institutions and banks. Unfortunately, India’s slow job growth leaves many graduates without adequate employment opportunities, making it difficult for them to cover basic living expenses, let alone repay their student loans. This financial pressure is leading to rising loan defaults among young Indian graduates. Further, banks and financial institutions face increased NPAs that create financial constraints and compel them to either scale their loan rates or discontinue schemes. According to the Ministry of Finance data from March 2021, around 9% of education loans issued by public sector banks in India were NPAs (non-performing assets) by the end of 2020. 

Unexpected events like the COVID-19 outbreak and rising geopolitical risks have severely impacted India’s financial situation. These challenges have made it even harder for students in dire economic circumstances to manage education loan repayments. Educational loan forgiveness programmes could be crucial to reducing the burden. However, India’s education loan system faces significant obstacles, including high-interest rates, economic instability, rigid repayment terms, a lack of transparency, and collateral requirements. Critics argue that the existing structure, dominated by stringent bank regulations and marred by inefficient loan disbursement processes, could undermine the effectiveness of any loan forgiveness programme, much like other initiatives.

India has already resolved the fiscal burden of loan waivers to support farmers and revive the agricultural sector. Since independence, two loan forgiveness plans have been initiated to establish credit discipline. Drawing the same beneficiaries, the same reform schemes might eliminate disruption from the student loan ecosystem. To ensure these programmes are more effective, the Indian government should focus on devising better implementation strategies, thoroughly reviewing past loan defaults, and reforming the underlying system. Tapping the root causes and addressing the specific challenges within India’s education loan framework could achieve a more successful and equitable loan forgiveness programme.

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