Category: Debt Management

Student Loans and Current Trends

The Rapid Growth and Changing Landscape of Student Loans

Explosive Growth in Education Sector

India's higher education system has expanded dramatically since independence, evolving into a more socially inclusive, mass-based system. Over the past two decades, the number of tertiary students has increased sixfold, surging from 5.7 million in 1996 to an estimated 36.6 million in 2017/18. The number of universities has also risen from 190 in 1990/91 to 903 in 2017/18. India has witnessed the establishment of more than 18,000 new colleges between 2008 and 2016, equating to over six new colleges daily. The number of technical institutions offering various programs has grown exponentially, increasing by 1,278 percent between 1980 and 2012. As the country harbors a large, young population with low Gross Enrollment Ratios (GER) in higher education, it presents opportunities for education loan providers, including banks and NBFCs. While India's GER in higher education stood at approximately 25.2% in 2016-2017, the global average varies from 8% in sub-Saharan Africa to 75% in Europe and North America. A survey reveals that India boasts 864 universities, 40,026 colleges, and 11,669 standalone institutions providing higher education, with a total enrollment of approximately 35 million students.

Regional Disparities in Education Loans

The distribution of education loan portfolios among banks highlights significant regional disparities. Southern India accounts for approximately 56% of the total education loan portfolio. Tamil Nadu and Kerala, in particular, together constitute 36% of the outstanding education loan portfolio. Other states that contribute substantially to these portfolios include Maharashtra, Karnataka, Andhra Pradesh, and Telangana. Regional disparities are primarily due to higher literacy levels and students' inclination to pursue higher education, especially in technical courses.

The Emergence of NBFCs in Student Loans

Nearly 90% of NBFCs' education loan portfolios are concentrated in six major cities, including Mumbai, Delhi, Chennai, Bangalore, Pune, and Hyderabad. Mumbai holds the lion's share of these portfolios, followed by Hyderabad and Chennai. These loans are widely disbursed, compared to PSBs, which primarily focused on southern states like Tamil Nadu and Kerala. Funding for education loans by NBFCs is predominantly channeled into postgraduate courses, particularly in engineering, management, and the sciences.

Funding Higher Education Dreams

For many families, the prospect of funding higher education fees can be daunting. However, educational loans have become an increasingly attractive option, making the process more manageable. The Indian government has approved loans of up to Rs 15 lakh for students seeking to study abroad. Currently, these loans carry a moderate interest rate, typically ranging between 12% and 14%, and require strong collateral security (100-150%) for approval. Repayment usually commences six months after graduation or upon securing employment.

An alternative option to avoid high-interest rates is to explore International Student Loans offered by various US organizations like ISLP and the Terry Loan. These loans generally feature lower interest rates, around 5% per annum, and offer extended repayment periods of approximately 20 years. They do not require collateral security but necessitate a US citizen or green card holder as a co-signer.

Educational loans cover a wide range of expenses, including college/hostel fees, examination fees, library/laboratory fees, book/equipment purchases, security deposits, computer acquisition, and travel expenses for students studying abroad. Notably, the State Bank of India extends coverage to two-wheelers, with a limit of up to Rs 50,000.

In India, the maximum loan amount typically ranges from Rs 7.5 lakh to Rs 10 lakh for domestic studies. For students pursuing education abroad, the maximum loan amount varies from Rs 15 lakh to Rs 20 lakh. Interest rates on educational loans typically range from 11.25% to 13.5%, with processing fees varying between banks. While PSU banks usually do not charge processing fees, institutions like IDBI may levy a 2.25% processing fee. Section 80E of the Income-Tax Act allows for the deduction of interest paid on educational loans, with no cap on the interest amount paid during the 7-year loan period. This deduction, initially applicable only to self-education, has now been extended to cover the education expenses of relatives, including spouses and children.

In conclusion, the changing educational landscape in India, coupled with the availability of educational loans, offers students and families more opportunities to pursue higher education, bridging the gap between aspirations and affordability.