Dr Manasvi M. Kamat
The presidential runner of the Democrats for 2020, Senator Elizabeth Warren announced a proposal this week that she claims would eliminate up to $50,000 in student loan debt for every person with a household income of less than $100,000 in the US. The borrowers who make between $100,000 and $250,000 would have a portion of their education debt forgiven as per her plan.
Back in India, Congress President Rahul Gandhi in his election manifesto has announced that his party will waive off interest on education loans issued before March 31, 2019 if it comes to power after the coming Lok Sabha elections. Gandhi also promised to introduce the single-window system for education loans and that till the time the student has not landed a job, the banks will not charge any interest.
Senator Warren proposes an ‘ultra-millionaire tax’ at annual 2 percent on American families and corporations with $50 million or more in wealth. With her $1.25 trillion plan she wishes to reshape higher education in the US by cancelling most student loan debt and eliminating tuition at every public college. She says they would pay for it with revenue generated by her proposed increase in taxes estimated to be $2.75 trillion over 10 years. In addition to eliminating undergraduate tuition at public colleges and universities, she plans to expand federal grants to help students with non-tuition expenses and create a $50 billion fund to support historically black colleges and minority serving universities.
Rahul has promised that it will separate organisations to ensure the regulation, grading and funding of colleges and universities. ‘We will provide UGC or its successor with sufficient funds to make liberal grants to colleges and universities, based on need and merit’, he remarked in one of his election rallies. The Congress-led government in the past did partially waive interest on education loans for economically weaker sections way back in 2014. The past waiver was only for households whose total income was less than Rs 4.5 lakh per annum.
Senator Warren stroked a right note taking cognizance that the vast majority of student loan debt is held by the federal government, said the government would simply cancel the eligible debt on its books. Doing so would affect more than 42 million Americans and eliminate all student loan debt for more than 75 percent of borrowers.
In India, Rahul has successfully captured the woes of Indian students desiring educational loans. Given the strengthening of the dollar against the rupee education abroad has increasingly become expensive in India. Banks charge interest during the entire period of study and the interest rates for education loans remain one of the highest in the 10-11 per cent range. By the time the repayment begins, young graduates are drowned in debt.
The education loan market in India is estimated to be around Rs 733 billion and India’s Public Sector Banks are the largest lenders in the education sector, disbursing over 95 percent of all loans. The Cooperative banks offer education loans worth around Rs 20 billion with the Non-Banking Financial Companies providing around Rs 50 billion.
The Regular student loans for education in India are capped at Rs 10 lakh and the bank’s policy mandates a parent or a guardian to register as a co-borrower. In actual practice the average loan size in India historically remained at Rs. 4 lakh as many did not have access to collateral or third party guarantee. This amount is peanuts given the rising costs of education. The data from TransUnion CIBIL show that there has been a 48 percent rise in the average ticket size of a newly-opened education loan going up from Rs. 5.73 lakh in 2015 to Rs. 8.5 lakh in 2018.
The cap on educational loan was increased from Rs. 4 lakh since March 2018 after the Narendra Modi government notified the banks to increase the limit amount of loans that do not require a collateral or third-party guarantee as security from Rs. 4 lakh to Rs. 7.5 lakh. This new amount still falls shorter by a lakh even if one considers the Rs. 8.5 lakh average size of the year 2018.
In addition to the high interest and low size of sanction there exist a third problem in India and this is more uncomfortable of the first two. RBI data shows that NPAs in education loans is on the rise with around 9 percent of education loans in India declared as NPA by end of 2018 compared to a 5.5 percent in 2015. The outstanding education loan amount at the end of 2018 was Rs 71,724.65crore, of which Rs 6,434.62 crore was NPA.
Bankers in India found the excuse of NPA’s to restrict their loan offerings for education and the figures are painful. The growth rate of education loans have declined to 2.7 percent in 2017 from 17 percent in 2015. Thus the educational loan waivers in India are very much needed, as in the US.
Warren has proposed where the money for her loan waivers in US will come. Rahul in India and very unlike the US Senator, failed to show as to how he will gross up the funds required to finance his proposals. The critics of Senators proposed tax argue that it would be difficult to implement the aide as valuation of wealth would pose considerable difficulties and that it would lead to more incidences of undervaluing assets for tax avoidance.
Whether in India, UK or the US, the problems of student debt and growing loan defaults are universal. It is heartening to see that principal opposition parties in US and India have understood the drivers of increase in student loan defaults and have proposals to address the problem well. It is left to be seen how well they execute their plans, if (at all) they get a chance to do so.
