In the 2018-19 period, over 28 million students were enrolled in various Indian undergraduate programs. Despite such a large number of undergraduate students, India is facing a severe shortage of well-trained professionals in several areas such as medicine and business administration. There are several reasons for this, but one of the most important is the unavailability of student loans of sufficient amount and duration.
Higher education in general, and medical education in particular, suffers from what is known as the “reverse tragedy of the commons”. While society can benefit from an increased supply of trained doctors, the costs and risks associated with obtaining that training are entirely borne by the individual. This limits both the supply of doctors and the supply of educational institutions willing to train.
From a student perspective, there are several challenges associated with paying for a college education that requires a higher level of commitment to the cost. Except for a few students whose parental or personal resources can help finance this education, the rest of them take out a loan as their only option.
In addition, there are cost uncertainties related to the institution to which they will be admitted and the total cost of training, even if they choose to go to higher education. In addition, there are income and related time uncertainties that can lead to very low income immediately after graduation.
All of this can result in high defaults for lenders, which limits their ability and willingness to lend a reasonable amount; for a reasonable duration; and at reasonable interest rates. These affect the ability of students to enroll in such higher education.
This is not a unique problem in India, but is shared by several developed and developing countries. In the United States, for example, the average cohort default rate for student loans is about 10 percent.
The government and the Reserve Bank of India (RBI) have already taken significant steps to address these issues. Education loans of up to Rs 20 lakh qualify for priority sector classification.
This provides a guarantee of up to 75 percent of the defaulted amount of unsecured student loans of up to Rs.7.5 lakh granted by registered lenders at an interest rate no more than 2 percent above the base rate.
With 29 registered lenders, all banks, the program has had a cumulative loan amount of Rs. 15,926 crore as of March 2020, 78 percent of the guaranteed loans in the category up to Rs. 4 lakh since its inception. In 2019-20, it hit just 10.11 percent of NCGTC’s annual target of 10 lakh loans.
With a few changes, CGFSEL holds the key to addressing the challenges discussed. Since the latest estimates of defaults for India are around 10 percent according to the State Level Bankers’ Committee, it may be possible for CGFSEL to reduce its guarantee to just 10 percent and offer it on a second loss basis, with the registered lender having both the first loss risk (of for example 5 percent) as well as the remaining senior risk of 85 percent and now enjoys a high rating.
With this approach, CGFSEL could potentially cover larger loan amounts over Rs 7.5 lakh (78 percent of the guaranteed loans were in the up to Rs 4 lakhs category) and extend the loan term up to 20 years, giving students ample time for repayment.
These partial loan guarantees and the performance of loan pools could also serve as a justification for reducing the currently very high need for provisions and the risk weights of the RBI for unsecured student loans. In collaboration with other institutions, CGFSEL could also facilitate the rating and sale of the senior portion of the underlying risk.
CGFSEL could also be extended to loans from NBFCs. However, the interest rate cap of 2 percent above the base rate effectively means that even expected losses are not factored in and, as researchers at the World Bank found in 2018, are not necessarily conducive to the development of a dynamic educational loan market.
In contrast, in the United States, medical school education loan interest rates can go as high as 13 percent. This equates to a spread of over 9 percent above the respective risk-free interest rate and was crucial in ensuring that students had adequate access to well-designed credit products.
Another area that should be explored is getting medical and other colleges that offer technical and professional courses more directly involved in credit default management. Like lenders, CGFSEL can formally register them and publish college ratings with the help of an independent rating agency.
CGFSEL could also regularly publish cohort failure rates for university education loans and examine the possibility of declaring universities whose cohort failure rates exceed a certain benchmark as not eligible to participate in the guarantee system. In this way, both students and lenders can be well informed about the performance of the student cohorts at these universities after graduation.
For example, in the United States, if the cohort default rates exceed a certain threshold, educational institutions must establish a default prevention task force to develop and implement a plan to cope with the high default rates and prevent access to federal student loans.
Historically black colleges and universities (HBCUs) in the US, for example, have taken a number of measures to ensure that their student loan defaults stay below the stated threshold. These include increased borrower awareness of obligations, borrower follow-up, and increased contact with defaulting borrowers.
Governments around the world have attempted to intervene in student loan markets through several mechanisms. One approach is to increase public spending on higher education. However, to keep pace with the rising demand for higher education, as well as higher costs (and private returns), other mechanisms such as government guaranteed bank loans (GGBLs) and income-related loans (ICLs) have also become increasingly famous in developed countries.
While GGBLs are regular loans, ICLs are government funded and are a unique product in that the repayment obligation depends on the borrower’s income exceeding a certain threshold. Once this threshold is exceeded, the repayments are billed to the borrower through the tax system, which makes administration inexpensive.
It’s also progressive as lower-income borrowers (either because they couldn’t find work or because they choose to work in deprived areas) may be able to pay lower amounts or, if they are below the threshold, nothing.
In Australia, for example, the repayment rates in relation to total income under the Higher Education Loan Program (HELP) vary between 1 and a maximum of 10 percent depending on the income level.
India has already introduced GGBLs through the CGFSEL. It does not yet have ICLs, even if the IBA Model Education Scheme contains elements similar to those of the ICL, such as flexibility for banks to offer moratoria and to telescope repayments over the life of the loan. However, as its identification and income tax systems are rapidly improving, this could be a good option for the government to examine now and gradually move away from GGBLs.
There are strong reasons for government intervention in the student loan markets in general, but particularly in higher and more expensive forms of education such as medical. Such interventions can take the form of efforts to help private credit markets develop further and more direct interventions such as income-related credit.
—Nachiket Mor is a retired banker and has served on the Reserve Bank of India’s Board of Directors and its Board for Financial Supervision for many years. Sowmini G. Prasad is a research fellow at the Financial Systems Design Initiative, Dvara Research. The views expressed in the article are the authors’ own views.
source https://collegeeducationnewsllc.com/new-directions-in-student-lending/
No comments:
Post a Comment