Burden of education loans

Burden of education loans

Representational Pic

So our state budget stands presented and simultaneously debates too stand triggered. Whether one understands the budget or not, one doesn’t shy away in dishing out opinions on its impact on day to day life. Good or bad, budget has its impact on all – be a rich, middle class or a poor.

It is an admitted fact that Dr Haseeb Drabu, Finance Minister, has transformed the state budget into an entertaining enterprise. It is people-friendly at least as far as its presentation is concerned as most complex things are understandable even to a common mind . His budgets (so far he has presented four state budgets in a row) have always remained loaded with innovations and a spectrum of hope.

Even as budgets are always prone to sharp reactions full of criticism, unprecedentedly, this time there is a sort of lull in negative debates on the budget. While addressing to the issues of its employees, the budget is in one voice termed as employee-friendly budget and almost every one is on same page.

At the moment let me pick an interesting initiative contained in the budget addressing the plight of poor and meritorious students. Yes I am talking about the government decision revealed in the budget that education loans will be made available to the students belonging to weaker sections and children of single mothers, who qualify top examinations to secure admissions in different universities, with interest subvention facility till course completion.

Even as intentions are visible to extend relief to the students though interest subvention on education loans, the current dismal scenario in the education loan segment does not vouch it as a relief to the targeted beneficiaries. If the current job scenario not only in the state but in the whole country coupled with growing default in education loans is taken into account, then the purpose of education loans stands defeated and are accumulating as a burden on the shoulders of student borrowers.

Today, most of the students who have taken education loans are trapped in a web of stress on two counts. First, they are jobless and are unable to repay even the principal loan amount and not to talk of interest portion. Second, even getting a job does not suffice their need to fund fixed equated monthly installment (EMI) as their perks don’t commensurate their liabilities.

One more bad thing that has happened with the sector is mishandling of interest subsidy. Notably, the HRD Ministry provides full interest subsidy to eligible students during the period of study plus a moratorium period of one year. Here several banks have failed to claim subsidy to eligible students due to lack of awareness among staff about the scheme. Resultantly, the parents are forced to pay the interest portion during the moratorium period. Its non payment has turned the accounts NPA.

Now what is the solution to this growing problem? The scheme needs modification wherein poor, but meritorious students are required to pay only principal amount after getting a job. The interest subsidy or interest subvention won’t work. The loan is to be simply made interest free for such segment of students. Of course regulatory guidelines don’t permit an interest free loan, but needs a strong will to do it.

We have observed that most of the default in this loan segment is in low-ticket size loans. This means, the student borrowers are from lower strata of the society and are eligible for interest subsidy/subvention . Let the scheme is redesigned for this segment where the students are not charged interest at least during the moratorium period. The interest portion can be calculated and kept in a shadow account and later banks can seek reimbursement  from the government. The student borrower should not be linked to claiming of interest subsidy/subvention. There is another and the most workable option too. Banks can pay the interest portion on such loans from their corporate social responsibility (CSR) budget. The banks have to do a simple paper work. Just tailor a CSR project for ‘promotion of education’ and bring this segment of poor but meritorious students under the ambit of this project as beneficiaries. Let banks calculate interest portion in such education loan accounts and square it by transferring the amount at regular intervals from their CSR budget. It would be a huge social service by the banks and would also help them to achieve annual mandatory CSR targets.

Precisely, interest subsidy or subvention seems meaningless in a scenario where default in education loans is rising fast.

(The views are of the author and not that of the institution he works for)