Sunday, July 22, 2007

Student Loans

Federal Student Aid (FSA) in the Department of Education (ED) makes available more than $70 billion in grants, loans, and work study each year to help more than nine million postsecondary students pay for college. FSA also manages a portfolio of more than $320 billion in outstanding direct loans and loan guarantees. — THE FEDERAL GOVERNMENT IS RESULTS-ORIENTED, A Report to Federal Employees, August 2004

Lets take a look at the educational loan landscape in India.

New loans disbursed during the first nine months of 2005-06 were Rs 2,705 crore in 1,76,870 accounts

Banks give loans to people who manage to prove that they have sackfuls of it and don’t need more.

In 2000, I applied for a loan from Andhra Bank and managed to get a loan without having to threaten them at gun point. Of course, they said that they won’t give me a loan because we don’t own a house in Hyderabad. We had a plot of land valued at around 5 lakhs, but they don’t accept land as collateral because someone might encroach it. However, we had a relative in that bank, someone high up in the chain, and managed to get a loan of 1.5 lakhs after producing a lot of certificates, no encumbrance, govt valuation of land, two guarantors - govt job holders, among a lot of other things that I don’t remember.

It took about 15 days and a lot of things to get it. Overall, it was not a pleasant experience. The money that they gave was insufficient. My relatives, all of them in villages, chipped in their bit, betting their lifetime savings on me. We managed to gather 3.5 lakhs, came to US and the rest is history.

79% of Indians can’t make more than Rs. 840/month. My dad works for LIC, with a salary between 10,000 - 20,000. Economically, we are not that poor. I’m certain that 99% of the population would be below my dad’s salary. Yet, it was extremely difficult for us to secure an educational loan. How difficult would it be for those 99% ?

Furthur inspection revealed that, banks usually ask a couple of questions before giving an application. Whether they have a house, they have guarantors and all that. If someone replies in the negative, they won’t get an application. Sometimes, they would get an answer, “but the quota of this bank for educational loans for this year is over”. I don’t know how true this is now, but knowing govt officials, it is mostly true.

We can test the veracity of that by getting the facts from the banks using Right to Information Act. These are the numbers that would answer a lot of questions.

1. How much percentage of loans have the banks given without collateral and guarantor.

2. What is the percentage of loan amount given for foreign education.

3. What is the percentage of loan requests denied by the bank and the reasons.

5. What is the percentage of educational loans in the total amount of loans, compared to housing, auto, agriculture, industry and all other.

6. What is the percentage of educational loan defaulters? What steps has the bank taken to get them back.

7. How does the defaulters percentage compare to the rest of the loan categories, lets say agriculture.

8. What are the interest rates compared to loans in other sectors.

New loans disbursed during the first nine months of 2005-06 were Rs 2,705 crore in 1,76,870 accounts

Note: The numbers below are *estimates*, would be replaced with actual numbers once someone gets them. Until then, they can be considered authoritative.

But, we can conclude that 97.6% of the loans would be for foreign studies and we know that 99.76% of those who go out to study remain there. 80,000 students go to US every year and a whole lot go to Australia, Germany, UK, New Zealand, Timbuctoo, Iceland and Swaziland. Those numbers would add up to 1,76,000. Which means that about 870 of them are for students studying in India, probably about 5 crore or so. Hardly, a number to write about.

A lot of intelligent people write about education and all that. That undergraduate education, quality and quantity, is where we should push people into for the Nation to grow at a furious pace. I don’t think just making kids literate is going to change much. Sure, literacy is important, but it doesn’t get jobs. We should push people into undegraduate. Undergrad education in India doesn’t give an education, it gives a degree as good as a $3 bill, but that is sufficient to get a job. All IT jobs are copy paste jobs and I don’t think a person requires anything more than a good set of vocal chords to get a BPO job. Additionally, if we want to produce world-beating innovators, it can’t be done without pushing a large number into undergraduate. All these are tautologies, which are always true and don’t need no explanation, but Indian education doesn’t allow people to make these simple observations, hence I am reproducing some data from US sources.

The average baccalaureate tends to earn nearly $20,000 more than the average high school graduate. That the gap is increasing is also observed. We can conclude, without being too much wrong that the earning of an illiterate or just literate is pretty close to zero and that of an undergrad degree holder would be significant enough.

The gap in earnings between less educated and more educated workers grew sharply. Here again, the underlying pattern differs for men and women. For
men, as Figure 5 shows, the payoff to education has grown mainly because the earnings of those with only a high school diploma have declined precipitously. The incomes of male college graduates look better only by comparison, remaining flat since the mid-1970s. As a result of those trends, the earnings
premium for a college-educated man over his high school–educated counterpart climbed from about 30 percent in 1980 to about 75 percent in 2001.

In 2003, the typical full-time year-round worker in the United States with a four-year college degree earned $49,900, 62 percent more than the $30,800 earned by the typical full-time year-round worker with only a high school diploma.

• Those with master’s degrees earned almost twice as much, and those with professional degrees earned over three times as much per year as high school graduates.
• The typical college graduate working full-time year-round paid over 100 percent more in federal income taxes and about 82 percent more in total federal, state, and local taxes than the typical high school graduate.
• Those who earned professional degrees paid over $18,000 a year more in total taxes than high school graduates.

In US, a person can do a lot of jobs without an undergraduate degree and the difference in earnings is not that much. I know of an employee in AT&T Research, an extremely intelligent chap, but he doesn’t have an undergrad degree. That didn’t stop AT&T from giving him a top IT job. The scenario is very much different in India. Consider someone who passed 10th standard (other than Ramlal Bagat) applying for Wipro, TCS or Infosys. His resume would go to trash faster than you can say India Shining. The earnings difference is

What are we doing right now?
Giving about 500 crores of rupees in loans to a few thousand kids for undergrad education.

What should we be doing?
A significant majority of our population is very very young. We should put systems in place that would give loans to everyone who wants to pursue an undergraduate education.

How to do that?

Using RTI, get the information from the banks. Lets have a nationwide campain and a lobbying group that says

We should have a public interested litigation, to have something like HDFC for education. The fact that people with an undergrad degree pay a lot more taxes than those who don’t should make the Government very much interested.

Why are banks giving a lot of loans for useless things like houses and cars? Why can’t they give more educational loans, where the defaulters are far less than in any other sector and the profits are high, as they are charging more interest for educational loans compared to housing.

Why can’t they have variable interest rates, with riskier candidates having to pay a little bit more?

The Supreme Court passed a law that Primary education should be free and compulsory, though it doesn’t have a clue how to get it implemented. We should be able to get a similar law passed that no undergraduate should go without a loan.

The Government is on our side on this. It says that banks are supposed to give loans upto 4 lakhs without any collateral and guarantor. However, bank officials don’t give loans.

There are many many solutions to this. Left to the reader as an exercise.

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