By Aman Singh
Sometimes our greatest strength may become our biggest weakness and this adage could very well hold for the retail lending sector when it comes to Student Loans. As per the data available with the Reserve Bank of India, by October 2023 Education loans had already grown by 20.6 per cent with the outstanding portfolio at Rs 1,10,715 crore in the current financial year, the highest in the last five years. Over 65% of this was attributable to borrowing for studying abroad.
A problem in the making?
One only has to look at the current student debt crisis of the US to understand what could go wrong.
Sajay Samuel, an award-winning professor of accounting at the Smeal College of Business at Penn State University, in his 2016 TED Talk pointed out how “dropping college incomes was creating a burden of unpayable debts.”
Today the problem has become even bigger. More than 43 million Americans collectively owe over $1.7 Trillion in student loans. Besides a slowing economy, the main reason is being attributed to poor choices of course and college that resulted in low paying jobs.
For India, the problem is even more complicated. A major chunk of India’s education loans are supporting US bound students with an average ticket size of Rs 40-60 lakh.
Students are borrowing in India to pay for their degrees from foreign institutions with the hope that they will be able to repay those loans with high paying jobs that they hope to secure outside India. Looks like we are exporting talent and equity and importing debt!
There are two major issues with the current trend:
If the choice of college and financing of those degrees is not done wisely, the prospect of jobs and high salaries may be at risk and debt that students have taken may become unserviceable. This may not only be debilitating for a person but impact the health of financing institutions.
If the student decides to stay on in a foreign country like the US, which they will most likely do in order to pay back their loans, India loses precious talent. Not only will Indian banks have contributed to the US in the form of college fees, but they would have also enabled Indian talent to fuel growth for the US economy.
What can we do to prevent this impending crisis?
So does it mean that students should stop dreaming about education abroad? Not at all.The problem does not lie in taking the debt. It lies in taking debt that does not create value and is not serviceable. Students and their parents need to make right decisions and be supported in making the right decisions by financial institutions and other stakeholders. As Professor Samuel points out in his TED Talk: students need to be enabled to make informed decisions about their future.
Here’s how we can empower them:
Students need to be supported in making the right selection of course and college after doing a thorough research and based on their personal context and career goals. Ensure that they pick a course that makes them employable without making a big dent on their pocket. This could mean not getting swayed by merely rankings but going for real value. A new university which may not be participating in rankings may actually come up with a course offering disruptive and contemporary skills faster than an older institute and be a better choice.
Financing institutions need to make their processes tighter to prevent NPAs and support students in taking the right funding. They should be guided to take only as much debt as they can safely pay back in the shortest time possible. Future plans, including the need to return to India, should be considered while choosing the loan.
An Indian student mobility report by University Living forecasts that by 2025 over 2 million students could be headed abroad and spend US $70 billion in Tuition and housing. It is a great statistic for the growth of financing institutions in India but only if students become wiser in planning their future and as a society we focus on ensuring that our demographic dividend remains our greatest strength.
(Author is Co-founder and CEO, Gradright)