Higher education is the responsibility of the state. It cannot dilute this obligation by asking commercial banks to offer student loans.
Educational loans formed the only new proposal for education made in the Budget 2012-13 speech of Finance Minister Pranab Mukherjee. The Minister promised to set up a Credit Guarantee Fund, “to ensure better flow of credit to deserving students.” The role and functions of the Fund are to yet to be clearly defined. Student loans are currently operated by commercial banks — public and private — as any other loan programme. The government has laid a few bare conditions in this context, and in 2009-10, a scheme of interest subsidy on loans was announced by the government for students of economically weaker sections.
Under the scheme, the government would subsidise the interest on loans borrowed from the schedule banks for the period of studies, which would be treated as a period of moratorium. The implementation of this scheme can be expected to be the main function of the proposed Fund, in addition to overseeing the overall implementation of the scheme of educational loans. There is, however, no budget allocation made for setting up the Fund. Allocation for educational loan interest subsidy scheme has been raised considerably from Rs.640 crore in 2011-12 to Rs.800 crore. The actual expenditure on the same scheme in 2010-11 was only Rs.203.3 crore.
Through the subsidy, the government wants to encourage students among weaker sections to go for higher education — technical and professional education. Student loans are gradually and increasingly becoming popular, with the number of loan accounts with commercial banks being 22.8 lakh in March 2011, with an outstanding amount of Rs.42,808 crore, but they are not necessarily popular among students of weaker sections. It is important to note that the government does not spend anything on educational loans, except for the interest subsidy. It does not have to spend huge amounts to promote equity in higher education either, as it believes that interest subsidy on loans itself is sufficient for this.
The Economic Survey (2011-12) makes the intention of the government behind the loans clear, when it states, “over the years, the divergent trajectories of costs and revenues due to rapidly increasing per student costs and increasing tertiary level participation has[ve] created immense pressures on the exchequer.
Moreover, subsidies are inequitable in the sense that irrespective of one's parents' wealth, all individuals in a state subsidized institution get the same level of subsidy. Therefore, there are views that argue for reducing government support for higher education and replacing it with better commercial student loans schemes” (emphasis added).
The government's two-fold intentions are clear: (a) to reduce government support to higher education, and (b) to replace it with student loans. Rather it intends to change the whole method of financing of higher education in the country!
Ironically, the government recognises that many countries in the world provide vast levels of subsidies for higher education. The government is also aware of the rationale. In the same paragraph preceding the above lines, the Economic Survey, stated, “Education being an important component of economic development and a driving force for economic growth, governments in India and across the world are subsidizing higher education.”
In support of extending commercial loans for students, the government makes a reference in the Economic Survey to a paper prepared at the Indian Statistical Institute (probably “Education Financing Policy: Income Contingent Loans and Educational Poverty Traps,” by Seher Gupta, Tridip Ray, Mausumi Das and Shoumitro Chatterjee). It will not be out of context to note that the said paper — or the extracts given in a Box in the Survey — argues for income-contingent loan schemes as against standard mortgage type loan schemes; it does not plead in favour of loan schemes against public subsidisation of higher education; rather the scholars argue in favour of a type of educational loans (income-contingent loans) against another type (standard mortgage loans). This is not new; in fact, several experts who worked on student loans argued for the same. However, few strongly prefer loans to public subsidies.
The arguments in favour of public subsidies in higher education are very strong, and so is the case against loans. Public subsidies in higher education are favoured on the following grounds: higher education is a public good, producing an immense magnitude of social, economic, political, cultural and technological externalities; higher education is a merit good, consumption of which needs to be encouraged; it is a critical investment both from individual and social points of view; it is one of the best instruments of promoting social and economic mobility and thereby equity in society; it is both equity and efficiency-enhancing at the same time; there are economies of scale in the production of higher education; and, above all, it is a human right, as stated by UNESCO long ago in 1948 in the Charter of Human Rights. These and other fundamental characteristic features of higher education provide a strong case for public subsidisation of higher education.
On the other side, the inherent weaknesses of student loan schemes as well as the practical nuisance involved in them are also widely known. Despite several supplementary measures, student loans, in comparison to public funding, are, like high tuition levels, highly regressive, adversely affecting the demand for higher education of the weaker sections; with the burden of loans on their shoulders, students could face severe psychological pressures, affecting their educational performance during studies and labour market performance after studies; and with loans not being available equally across all disciplines but going more towards employment oriented courses, the other disciplines of study might slowly perish, affecting the very structure of the higher education edifice.
Unlike in a few countries, and in the past in India when the national loan scholarship scheme was in operation, it is not the government, but commercial banks which run student loan programmes nowadays. Banks, being banks, have their own principles of business. Obviously, they would consider the repayment capacity of the student as the main principle before advancing a loan. Hence many deserving poor students who cannot provide collateral may be denied loans. This is so, despite several regulations issued by the government and/or the Reserve Bank of India. Banks do not necessarily have any consideration for promoting academic excellence or for helping the poor. Moreover, educational loans have become a very powerful instrument for promoting private education.
Change in attitudes
Above all, student loans change the attitudes of students and of society as a whole towards the very nature of higher education. Public financing of higher education recognises that higher education is a public good and it is the sacred responsibility of the state to provide it to its citizens. Methods like student fee dilute the state responsibility. Student loans assume that higher education is the responsibility, not of the state, nor of the families, but of the student himself, as if education is completely an individual private good, as it is mainly the student who takes the loan and it is the student who will be repaying it. Parents are at best guarantors of the loans. This shift in responsibility from state to parents and then to students will have dangerous implications not only for the development of higher education, but also for the very social fabric and national development.
While many countries heavily subsidise higher education and rely on student loans only partially on a very limited scale, the government of India intends to use this method to altogether replace public funding of higher education.
(Jandhyala B.G. Tilak is with the National University of Educational Planning and Administration, New Delhi. Email: email@example.com)