Funding higher education: Easy financial assistance is not enough

The debate on using public money to fund higher education is not new. While most of the gains from higher education accrue to the person receiving it, it also produces positive externalities including direct economic gains, higher research and innovation, and a more skilled workforce in the economy. Given the costs involved in higher education, especially STEM (science, technology, engineering and mathematics) courses, students often have to pay more. In this context, the Union Cabinet’s recent approval of the PM Vidyalaxmi scheme must be welcomed. Covering more than 2.2 million students, the financial-assistance scheme will provide educational loans to meritorious students who are admitted to higher educational institutions but face financial constraints.  To begin with, the scheme will apply to the top 860 quality higher educational institutions in the country. 

Supplementing the Central Sector Interest Subsidy (CSIS) and Credit Guarantee Fund Scheme for Education Loans (CGFSEL), the PM Vidyalaxmi scheme will offer full interest subvention to students with family incomes up to Rs 4.5 lakh during the moratorium period. Further, students with an annual family income up to Rs 8 lakh will be eligible for an interest subsidy of 3 per cent on loans up to Rs 10 lakh during the moratorium period. For loan amounts up to Rs 7.5 lakh, eligible students will get a credit guarantee of 75 per cent on outstanding default. The collateral-free, guarantor-free education loans are, therefore, expected to empower poor students to pursue higher education. 

The market for education loans in India has evolved significantly over the years, with the outstanding portfolio under education loans growing by 17 per cent to Rs 96,847 crore in 2022-23. However, over 90 per cent of education loans in the country are used for pursuing studies abroad. Additionally, in 2022-23, about 8 per cent of all education loans disbursed by public-sector banks turned into non-performing assets (NPAs), higher than the overall NPAs in the banking system. The average default rate is much higher than the default rate for education loans to students in premier institutes, suggesting that the bulk of the defaults in the education loan portfolio are by students studying in secondary institutes. In this respect, the scheme will not only help ease access to credit for poor students but also shield banks to some extent. 

However, it must be noted that subsidising higher education through easy loans may be necessary but not sufficient to attain desired outcomes. The problem in India is not only affordability or financing options; the availability of quality institutions itself remains a significant issue. Frequent question-paper leaks, including in top examinations like the National Eligibility cum Entrance Test, the proliferation of coaching centres, and a string of suicides by students preparing for entrance exams for premier institutions are symptoms of a bigger problem — a shortage of quality institutions. This is also the reason why most education loans are taken by students studying abroad. Thus, while improving the ease of credit for higher education must be welcomed, the government should not lose sight of the deeper problem. India needs a large number of quality educational institutions to prepare its next generation to remain relevant in a fast-changing world.