Dealing With Student Loans

The student loan crisis can be understood as the situation of the increasing amount of debt that students would be accumulating for financing their higher education. Globally, students do finance their education after high school on their own and hence the topic comes under a huge priority. With the rise in the cost of attending college at a massive scale, it can be assumed that there has been an immense increase in the rise of student loan debt too, and as stated by Federal Reserve itself, student loan debt in the United States has been around 2 trillion dollars till date with the average borrower owing around $35,000. The cultural practice of Nepal and South Asian countries makes it all easy because students’ educational financing has usually been sponsored by their parents. But that is not the entire data here. 

Nepali students going abroad for study took away around Rs. 60,000 million outside the country in the previous fiscal year which is stated to be 150 per cent more than last year.  Nepali financial institutions have never given enough priority to educational loans, and there has never been an attraction of these young students to avail of student loans.

Impact

With increasing costs that are being seen in the case of higher education, there has been a trend of taking loans from financial institutions which ultimately adds debt burden to those children affecting their overall ability to make major purchases from real estate or vehicles, limiting their career choices. It has also been regarded that this burden has been impacting the overall economy because delayed debt payment delays major milestones of their life like getting married, having children to buying homes - which somewhere affects the economy as well. Similarly, there then lies the next major impact regarding inequalities that would be above because students from low-income families would be deterred from attending college because of high cost. 

Seeing the Nepali context too, only those parents with a good source of income and enough mortgage will get to enjoy the loan, further promoting a higher set of inequalities there. Apart from this, mental health issue accounts to be next major aspect that would be seen and felt when these students are often been seen as the victim of anxiety, depression, and other issues. There have been several times that the Nepal Government has included its plan to provide loans to students based on their degree. However, this never became successful. The problem with the Nepali context is that the system is not well managed and financial institutions cannot accept the certificate as a mortgage because the university easily provides the next copy of the certificate through complaints of lost certificates, questioning the integrity level. 

Had the certificate been digitally withheld everywhere, it would have been an easy move. Apart, there lies the next problem regarding the difficulty in repayment under which students would have a tough time repaying these loans whereas graduates in Nepal usually have a tough time finding well-paying jobs themselves. So, the assurance of paying back the loan after the job seems to be a vague term in the Nepali context. Also, when interest rates are high for a student loan, they won’t have any clear-cut vision about paying the loan there. 

There is a next issue for the same case then because it has been noticed that students seek loans just for fulfilling their short-term needs without fully understanding the implication of borrowing a loan. They won’t have even a concrete plan about the payback period, because when a student takes a loan above three million to study MBBS, what a doctor earns and what would be time to pay back the loan is all an imaginary story for them, which financial institutions don’t trust much about. Money borrowed from banks is not the bank’s money but depositors’, so there won’t be many options for forgiveness either. And, even if such a loan is disbursed, it would lead to a negative credit score for the student from his early career itself - which would be troublesome for the borrower too. 

Risk 

Financial institutions also adopt the best ways to ensure that the loans that they disburse are relatively low risk. Every loan that they disburse is an investment they make out of depositors’ money and they prioritise more on such investments that would be low risk. Banks primarily face the issue regarding default risk in student loans where the borrower would be seen with the vision of not being able to rely on their loan and banks fear they have to write off the loan as a loss which would impact their profitability too. Then there is the rate regarding interest rates where banks would be exposed to interest rate rise and fall too, and if banks are not able to earn expected money from their loans, that would impact their profitability. 

While there is a higher rate of interest in hypo loans or home loans, why would they prioritise student loans there? Internationally, it has been seen that banks offering student loan are subject to different regulations and laws which keep on changing over time and when regulations are more stringent or if the law changes, banks will have to adjust their lending practices. The state will act in favour of students and that would impact banks’ profitability - which banks fear the most. The case happened in the United States itself where Biden’s administration programme asked to forgive $20,000 in student debt for Pell grant recipients and $10,000 for non-Pell grant recipients making less than $125,000.

Also, the biggest fear of banks is regarding reputation risk where a high level of default or other negative outcomes about student loans would surround, impacting the reputation along with the ability to attract a new set of loan clients followed by credit risk which assesses the creditworthiness of borrowers for determining their ability to repay such loans. So, making poor credit decisions can impact their profitability too.

(The author is Deputy Manager, Rastriya Banijya Bank Limited).