Wednesday, May 22, 2024

IN FOCUS: student loan or millstone around neck?

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The crippling anxiety that kicks in while applying for a student loan makes many a bright and eager student diffident about even going abroad for studies. The loan is often attractively packaged so much so that the student opting for it rarely goes through the fine print of the loan documents. If the loan is from a private bank or an unscrupulous financial institution, the student may not be properly informed about certain factors that are hidden or deliberately played down.

By default, the student may be tied to a huge burden his or her young shoulders cannot bear. All that the student knows while applying eagerly for a seat in a college or university abroad is that the exorbitant tuition runs into lakhs, and sometimes, crores of rupees. The Pioneer’s Amartya Smaran looks at some of the ways in which students can make informed choices and decisions so as to insulate themselves from the possibility of the student loan becoming a millstone round their neck for years.

Noam Chomsky, legendary American theoretical linguist once said, “Students who acquire large debts putting themselves through school are unlikely to think about changing society. When you trap people in a system of debt, they can’t afford the time to think.”
Chomsky himself enrolled in University of Pennsylvania, an Ivy League schools, in 1945. Can you guess the tuition that he paid? Just $100!

Today, tuition is prohibitively high in most of the universities and colleges, both within the country and abroad, mainly because institutions are switching to self-financing mode and governments are phasing out and withdrawing from public funding of educational institutions.

In India, public sector banks(PSBs) accounted for 90 percent of the education loans disbursed to students, while private sector banks and regional rural banks(RRBs) accounted for 7 percent and 3 percent of education loans outstanding, respectively, as of March-end 2020.As of June 30, 2022, outstanding education loan stood at around Rs. 80,000 crores. Last year, the 12 public sector banks witnessed 8 percent of all higher education loans they had granted turn into non-performing assets (NPAs) or loans that never get repaid once the repayments have begun.

This rise in default rates is directly proportional to the outflow of throngs of students for higher education, according to industry watchers. In the first three months of 2022 itself, 1,33,135 Indian students left for other countries for educational purposes. Overall, 2,45,601 Indian students left for different countries (inclusive of 228 countries) citing education as the purpose of travel in the first six months of 2022, according to a report by the Ministry of External Affairs. While 4,44,553 students went abroad in 2021, latest reports suggest a 68 percent growth in students going overseas for higher education.

About 200 million students were part of global education institutions in 2014 and experts predict that the number would double by 2030. More outflow of students simply means more borrowings!

Loans disbursed by the State Bank of India, Canara Bank, Union Bank of India, and the Indian Overseas Bank account for 65 per cent of the total loan portfolio among PSBs. Surprisingly, PSBs encountered a high rate of defaults pertaining to low-value education loans (loans up to Rs 7.5 lakh). Therefore, banks are acting cautiously while extending low-value education loans as they don’t want to add up bad loans to their portfolio. The default rate of loans granted to students in premier institutes such as IITs, IIMs, NITs and AIIMS is low(0.45 percent) as compared to secondary institutes.

“Rate of default being high is connected to the state of the Indian economy,” asserts Shyam Kumar, a former banker from the city. “As the condition of the economy has deteriorated, the number of failing businesses has also increased. As a result, people who have taken loans to start or continue running their businesses are not able to repay them. The role of demonetization, Covid, and lockdowns is another aspect leading to the shutting down and bankruptcy of small and medium enterprises. Bad loans are simply a reflection of this state of affairs.”

Shyam reasons: “Indian banks alone cannot solve this issue. At the most, they can soften the terms and conditions for providing educational loans. But what can they do with regard to widespread unemployment, declining economic growth, and poor job generation? When it comes to reducing loan defaults, they must scrutinise the applicants. The government must come to a decision on how the higher education sector operates: solely as a profit-making business or one requiring public investment for strengthening the country’s economy. Exorbitant tuition fees can become a problem in the long run if the job market does not have enough well-paying jobs to allow students to pay back their loans.

Something similar has happened in the United States where many students have started avoiding higher education on account of how expensive it has become (coupled with the difficulty of getting a job and saving enough to repay the loans). They are opting for tradesmanship (a bit like Industrial Training Institutes in India).”

How about the impact of these NPAs on the Indian economy? “The banking sector has recovered very well from the non-performing assets (NPAs) issues and now it will start surfacing again, but it will not have a major impact because the percentage of education loan when compared to home or other things is much lower,” avers N. Gowri Shankar, a certificated financial planner.

In a conversation with The Pioneer, N Gowrishankar, certificated financial planner, elucidates the best possible ways in which one can structure a plan for their children quite early. “From the day a child is born, the parents should start investing for the child’s higher education. One is you build a corpus; in that case even if you require a loan, you would have already saved the majority and you would be applying for a smaller loan and repayment wouldn’t be burdensome.”

Tapping into a crucial investment strategy that could yield benefits at a later stage, he shares: “If parents start a small SIP in the child’s name for 15 years (180 months). The amount of money that they will be expending is Rs. 10,000 multiplied by 180 months, i.e., Rs. 18 lakhs. That amount is most likely to grow into Rs 56 lakhs and this is a big amount. Suppose the child is going to do a medical or integrated technology course or a 5- or 6-year course, every year if they have to take Rs. 10,00,000 out of it also, there will be no tax though the child would have turned a major by then because there’ll be no other income. Then every year they can spend somewhere around Rs 12-15 lakhs depending on the duration of the course. This is something that one has to plan because it is very easy to implement.”

What are the things that students should be wary of while seeking education loans? “Firstly, one should select a good financial institution like a public sector bank and not get into the hands of any private lenders or financiers,” says B Anil Kumar, an expert in insurance and investments. “Public sector banks generally intimate clients whenever there is any change in future with regard to the loan or the conditions. Private banks have a lot of hidden clauses wherein they automatically change their terms and conditions in between. These precautions need to be checked by the students.”

On the so-called ‘optimal’ interest rate, Anil Kumar says: “The prime lending rates are fixed by the Reserve Bank of India based on economic factors such as inflation. RBI does a lot of manipulation in the interest rate. Only then can they control the inflation as well as the cashflow in the system. Whenever there’s a change in the interest rates from RBI, immediately all the banks follow through. Naturally, the loans get costlier when RBI increases interest rates because banks have to pay higher amounts for the depositors. Therefore, they’ll have to increase the lending rate as well.”

In the event of any shortfall of funds, the central bank of a country lends money to commercial banks at a certain interest rate. This is known as repo (repurchase option) rate and monetary authorities use this concept to control inflation or increase liquidity of banks.

In order to restrict borrowing or control prices, the government increases the repo rates and decreases it accordingly to pump in more money into the market and support economic growth. In India, whenever the RBI decides to increase the repo rate, the commercial banks must pay higher interest rates for the money borrowed.This inturn affects public borrowings such as home loans, student loans, EMIs etc. As announced by the Monetary Policy Committee(MPC) on February 8, 2023, the current repo rate stands at 6.50 percent, a 0.25 change from 6.25 as on December 7, 2022.

Explaining the correlation between the fluctuating inflation and rising interest rates, he points out: “To control inflation and money supply in the economy, RBI is continuously increasing the interest rate and therefore the costs of loans are also at the peak now. This has approximately been the trend over the last two years. Now that the inflation is under control and within the benchmarks of the government as well as the RBI, maybe they’ll start reducing the interest rate. When the interest rates are going down, it would be advisable to take a flexible interest loan which the students take.”

A moratorium period/repayment holiday is a window of time where the borrower is not obligated to make any payments. However, one should keep in mind that the banks would continue to charge an existing interest rate on the outstanding principal amount. In most cases pertaining to an education loan, a student is granted a repayment holiday/moratorium period of one year after the completion of the course or six months after securing a job.

Advising young students to pay off hefty loans in an efficient manner, Anil says: “In case the parents or the student is financially sound enough, they shouldn’t keep that holiday. They must start making payments at an early stage once they start earning because their costs will be less. Let’s say immediately after the campus one gets selected and gets a high paypacket; they should plan to have a higher amount; their expenses might be less.

He/she might be a single person and doesn’t have their spouse to support. Suppose their EMI is Rs 25,000 a month, at the initial stages if they can double the amount, one can spare more money. This would be the ideal way of starting off the repayment process and finishing one’s commitment at an early stage.”

Annam Indhu Ravindra, a master’s student took a huge loan of Rs. 58,00,000 to pursue an Aerospace and Mechanical Engineering course in the USA. But halfway through the course, she elected to switch to Computer Science Engineering stream for bettering her job prospects.

“We students from other nations have a lot of limitations,” observes Indhu Ravindra. “I’m not saying that it is impossible to do anything here, but it definitely is not easy as it is in our home country. Getting a job in a field which needs high clearance is very difficult and almost impossible for immigrants. Hence, I had to shift to a field which is easier to get in [easier than getting a clearance] and something which puts food on my table and clears the huge amount of loan which I have previously taken.”

Speaking of how daunting it had been for her to borrow such a hefty sum, she explains, “It made me second guess myself. I had so many dreams to pursue but this huge amount of loan made me think twice if my dreams were worth pursuing as I am starting my life with a massive amount of debt. I had to get a well-paid job to clear my debt and the uncertainty of landing a job was just frustrating.”

Today, Indhu is quite comfortable paying off her debt. She says it is a huge relief to know that there is a proper plan and a lot of people to advise her on how to pursue her career and end up with a job. She quips, “Job= Money= Clearance of debt and stability.”

Striking a positive note about the loan per se, she remarks: “Speaking as a mediocre person, I would say it is all worth it. Keeping aside the career and passion, it is worth visiting other countries. The exposure we get and the cultural diversities we get exposed to, the independence of living in a different country makes me believe that we discover our true potential, and it makes us live to the fullest. Again, I’m just a student with a huge debt!!!”

Sumanth Chowdary is a software developer engineer at Amazon.The young developer is one amongst thousands who’ve been affected by mass-IT layoffs.
After completing his bachelor’s in Computer Science and Engineering from a reputed college in Hyderabad, Sumanth Chowdary mustered the courage to take the leap and pursue a master’s in Applied Mathematics with scope to major in Data Science at State University of New York Albany.It was Sumanth’s dream to study abroad but applying for a loan proved to be a major hurdle. Despite being in possession of several acres of agricultural land, he could not easily obtain a sanction letter. He says that is because banks do not consider agricultural land as a collateral.

His application was rejected by four banks and seven Non-Financial Banking Services firms. However, he was relieved when he discovered a UK-based NFBC — Prodigy Finance, that provides loans up to $100,000 based on tuition and living expenses based on the student’s merit.

However, Sumanth found himself in a rather complicated situation. “The recession hit hard; so, stocks fell and all of the NFBCs, including Prodigy Finance, where I got my loan sanctioned, increased the ROI from 8% to 14%, which is a significant increase. I was fortunate enough to be able to refinance with Leap Finance by presenting my Full-Time Offer letter from Amazon. Leap Finance offered me a fixed rate of interest of around 7.5%, which was significantly lower than Prodigy Finance, allowing me to avoid paying high interest rates.”

After refinancing with Leap Finance, Sumanth received 50,000 dollars and paid off his previous loan due at Prodigy Finance. He shares: “All of this happened while I was still working for Amazon, but now that I have been affected by the mass layoffs, it may be difficult for me if I don’t find another job within two months. However, I believe that I will eventually find work, and in the worst case, I will manage my expenses because I have a good amount of savings, and Amazon’s severance package will also help. Aside from that, my loan term is seven years, so paying 900$ per month should not be a problem.”

Sumanth feels studying abroad is more of a choice and not a requirement of sorts. “Students in India are doing great with a bachelor’s degree alone. So, spending lakhs of money on abroad education is personal choice so I feel that the Indian government has nothing to do with these situations, whereas a constitutional federal republic country like United States of America has different set of rules which they follow for the benefit of students belonging to their own country and majority of the Americans pay only the in-state tuition fee which is almost half of the amount which we pay at some institutions; it is way more less.”

Perhaps one wouldn’t be able to justify the reasons for the exponentially growing tuition payment rates in colleges abroad. In the 1950s and 60s higher education was virtually free in the USA since it was heavily subsidised. The situation has drastically changed since then in the US and elsewhere across the world. Rising student debt, increasing default rates, and aberrations in disbursement of education loans in India needs close attention.

In August 2022, the Biden administration announced a broad-based plan to cancel student debt that was to benefit 45 million student debtors.The plan was intended to cancel up to $20,000 of federal student debt for Pell grant recipients and up to $10,000 for other borrowers. In order to qualify for student debt cancellation, borrowers could not be those earning more than $125,000 annually, or $250,000 for married couples filing taxes jointly. This decision did stir up a noisy conflict between the Democrats and Republicans.

Subsequently, lawsuits prevented the US Department of Education from implementing the one-time student debt relief program. But the students who expected to benefit from the policy are really thankful for it and a hopeful of a legal solution.

Will the Indian government take US-like steps to benefit at least some sections of its students, especially those who could be negatively impacted by the massive layoffs occasioned by the economic slowdown and the worsening job market? It is high time policymakers addressed these and related issues to ease the burden imposed by most of the student loans.

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