Education Loan Business in India: An Abysmal Scenario

Loan-Shark

Well, many times my friends discussed with me on the subject of this blog. I felt moved by the observations and thought I should write on this subject.

You see Education Loan Business in India has turned into an abysmal scenario.

I still remember my young days of school times, education was meant to be mainly restricted to the Brand and Reputation of the college. Tuition Fees was never the topic to worry about much. I recall a decade back, when fees in Universities in India for courses on B. Com. or B. Sc. or B. A. was very low and pretty affordable. It was somewhere 1000 to 10000 INR annually for a 3 years graduation course.

Then came the boom of Engineering and MBA throughout India. Started almost 2 decades back. Plenty of private engineering colleges popped up through out the main land. Huge population churning out young every year who wanted professional courses of Engineering/ MBA/ Medical/ Dental/ Fashion/ CA/ etc. The maximum number got attracted by Engineering and MBA. The graduates became ubiquitous and oversupply resulted in degrading of the value of the degree.

However nonetheless the national IVY colleges tag within India was still attractive, whether they were IITs, NITs, few other good technical institutes for undergrad, and for post graduation again IIMs, and few other good B Schools. For Medical it was AIIMS, and for fashion it was NIFT, etc.

The craze for admission into these institutes was near madness. One can never think of anything better than this. Realizing the potential (to pay) of students, colleges in the name of providing better infra and maintaining autonomous state,started increasing tuition fees by leaps and bounds.

One must admit now that these good institutes with hallowed halls are out of reach for at least lower middle class in India. And this fact is very troubling and disturbing.

The Indian economy was doing pretty well in the period of 2002 to 2008 and no one objected to this increase in tuition fees. During the time of first NDA Govt. in India 1999 to 2004, they in very last of their tenure noted this increase and rightly objected. Predictably, institutes opposed and made huge hue and cry on this move of the Govt.. Somehow the NDA was not able to win in 2004 assembly elections and the institutes were now free to go ahead with their plans as the next Govt. under UPA saw no problem in this phenomenon.

In year around 2006 tuition fees at IIMs was near 4 lakhs INR and started sharply increasing thereafter year by year. At the same time privately funded B School ISB Hyderabad was charging almost 22 lakhs INR for their one year MBA course. (As argued) seeing the potential of students to pay hefty fees for the prestigious tag and in hedge of the so called “great placements”, fees at IIMs reached an all time high of anywhere between 12 to 24 lakhs INR by 2012. A sharp increase of 3 to 6 times in short duration of 6 years. It is noteworthy that placements remain flat during the same tenure. The average placements at top B Schools were in the range of 8-14 lakhs INR in 2006 and the same figure was in 2012. Perhaps placement took a hit with many passing out even without decent jobs and might be without jobs. (Please note that I’m talking here only for top 20 B Schools in India.)

Interestingly IIM Lucknow acknowledged this fact (mutely) and for the first time any institute decreased its tuition fees from 12 L to 10 L (a year ago). However other colleges  failed to acknowledge the grave situation and kept on reaping the hike.

India has a population of 1.2 billion hence there is no dearth of applicants.But in recent years I’ve observed the increasing unrest among the applicants and they have started questioning the usefulness of such a costly education. They ask these questions to alumni rather than to the govt. or institutes or even banks who are equally benefiting.

It is important to note that middle class in India always aspired to send their children in these elite colleges including IITs, IIMs, etc.. That middle class by very definition have limited family savings. Parents cut down their own any so called “luxury” expenses such as annual vacations which can cost 50k bucks, or painting of the house which can cost again 50k bucks, or cancelling idea of buying car which can cost 400k bucks, etc.. These children have moral duty towards their parents and family as whole.

Now children of these house holds are lured to elite colleges because of their brand power. Its a natural attraction for any middle class, upper middle class, rich class, or affluent class. But 90% of the batch is comprised of only middle or upper middle section of the society. So this 90% for obvious reasons cannot afford huge tuition fees without education loan. Now Banks in India cleverly started offering heavy interest loans at the rate of 11 – 14% without collateral.

The very same guys who want to to do something good for their lives and even for their nation (coming from top 5% of their schools thru hard work) took this heavy loan in the range of 10 to 25 L. The disappointing fact is that the jobs started disappearing 2008 onward. First the reason was cited global slowdown. But global economy recovered within a year. However in India, there was no sighting of rosy economy. Scams broke out during the second tenure of UPA regime in India with an all time low of fresh investments or fresh projects (crucial for job creation) and jobs took a huge hit and started severely plummeting. GDP growth rate fell from high of 9% in 2006 to 4.5% in 2012. Note that in such a gloomy economy with very low GDP growth rate naturally there will be dearth and scarcity of high paying jobs. The Manufacturing sector growth remained flat or rather it was in minus. The bright guys who were passing out from top colleges with heavy education loans were now flummoxed where to go. Few chose entrepreneurship route. But this phenomenon is limited to only very few, as tip of the iceberg, with probably only 5% success rate.

No B School or even T School ever recognized the grave situation. They were all busy in playing number games and gold plating their placement statistics. As far I remember only IIM-A has CRISIL certified placement data. With an heavy loan which is almost equal to 10 years of any simple family’s savings students were literally forced to join irregular job profiles not matching to their skills.

India is not a country where one will happily go for 20 lakhs INR course when your father is earning 10000 INR monthly from last 10 years. He or she is actually forced.

It is also very troubling to note that an average Indian is paying heavy Income Tax, Education Cess under Service Tax, but when it comes to his or his children education he is again coming across heavy tuition fees, with high bank loan interest rates (even at top govt. institutes). Where is the Govt. collection of taxes going when it is not even reaching the top govt. colleges annual budgets.

The more disturbing fact is that Education Loan interest rate lies somewhere in between 11 to 14%+. In contrast House Loan is offered at 10% and Car Loan is offered at 8%*. How can you charge more interest rate for something as noble as education?

+(house loan in India is marred with black money and probably needs a separate blog to discuss), *(thanks to the strong automobile industry lobby)

Compare this case with other countries. In Germany the tuition fees is highly subsidized by the Govt. for both domestic and international students. In USA the education loan interest rate is 1-2%, easily available if you are national of USA or OECD countries, and with lenient terms. Majority land in a pretty decent job after graduation provided you are from a reputed institute. The same case is not working in India any more.

Now role of banks also looks clever and opportunist. Initially the banks were not even allowed to offer collateral free loans for the sum greater than 5 lakhs INR.But they skewed the policy and started offering up to 25 lakhs INR. Probably colleges didn’t went far beyond 25 L limit as it could have raised more eyebrows and unrest among the applicants or their parents (society at large). It is a clever move on part of the colleges and banks. The whole education loan business started flourishing and the victim was common Indian Middle Class society.

It is noteworthy that encouraged by the huge increase in tuition fees by top govt. institutes almost all the private institutes got the ready made license to follow the cue.

It is also noteworthy had the banks not offered these collateral free loans to students, colleges could have never been able to raise fees up to this level. 

Previous Govt.s traditionally have always been busy to offer loan waivers to farmers in the election year. But what about Middle Class who are doing great degree of hard work and being trapped in loans thru education loans. Later they made trapped with House Loans. Why education is so costly in India?

After all India is a developing nation and such high tuition fees can not be justified comfortably. I hope that in coming years rationalization should happen in this arena and education loans interest rate should be lower than that of car loans and house loans. I also hope that Indian Economy may regain its growth trajectory and start absorbing the young aspirant Indians in deserving jobs.

God Bless!

www.rishabhagarwal.in

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