Education by far is presumably the most crucial driver of society and economy. Especially in the context of developing economies, the future to social and economic glory can easily be attributed to education. The criticality of high quality education has been aptly recognized in our system, which is the reason why all leading banks offer education loan to aspirants of higher studies. However, things have changed recently, thanks to challenging economic times; education loan has become a problem to borrower exerting tremendous pressures on banks and individuals alike.
Promotion of education as a social initiative has much to do with its economic benefits. Most developed nations identified the excruciating gap in promoting economic growth ensuing due to lack of well-established education system. During Industrial Revolution, the responsibility to educate and train workers on standards of the industry was formally initiated under a vibrant education system. Benefits to such training facilities were obvious in the industrial growth that followed. Today, almost every initiative is oiled through education system. Our society gained tremendously since.
Formalization of education led to sharp rise in the cost of education. The burgeoning cost slowly made education out of reach for many aspirants, which had natural impact on the social fabric that was highly dependent on the education system. Education loan bridged the gap aptly. Education is no more a function of affordability; it had become a function of finance. And banks played a major role in promoting education through finance.
However, today, education loan has become a sensitive issue affecting both banks and the borrowers. Defaults in loan repayment are rampant. There are reports of borrowers not repaying their dues on time. Whether the trend is deliberate or out of compulsion is a matter of deliberation. With more than Rs. 50,000 Croresgiven out on education loan in India, it is obvious why banks are a nervous lot today. Recoverability of loan notwithstanding, the greater issue is how the situation shapes up the future of education.
Tough economic condition is one reason of the growing trend of non-repayment of education loan. It is tough out there even for a highly skilled professional. It is likely to be very tough for who have graduated recently. In absence of well paying job, there is no way borrowers can pay back the loan. As the economic conditions improve and jobs come back in the market, loan repayment is likely to improve.
Banks, on the other hand, also have a big role to play. Education loans are generally disbursed on a five-year term. In a tough economic conditions and high interest rate regime, it would be difficult for even law abiding borrowers to repay the loan in time. Increasing the term on loan would reduce some pressure on such borrower. As we speak, some banks are contemplating increasing the term up to 20 years. This is good news, especially considering that the parents of the borrowing students guarantee most of the loans.
Education loan is one of the most innovative solutions of the modern day finance. Not only does it benefit the individuals aspiring to acquire higher education, it benefits the society as well. If borrowers do not pay in time, banks would take precautionary actions to reduce their exposure. If banks become restrictive in distributing education loans, it would be hard for our future generation to go for higher studies. Both the borrowers and banks have a role to play in shaping the future of the country, therefore, both must ensure that a powerful tool such as education loan does not get buried in the ground.
(The writer is Director, InvestCare, leading wealth advisors. You can reach him at samar.vijay@investcare.in)