Educational loan subsidy

Business Standard today has a news story on a concessional education loan scheme being crafted by the ministry of HRD. The essence of the scheme appears to be waiver of interest on educational loans.

"At present, students who take loans from banks get a moratorium period in the sense that they don't have to pay interest till they complete their studies. But with the launch of this scheme, the entire interest amount would be subsidised (waived)," an official told Business Standard.

The loan amount taken by the student should be commensurate with the course fee he/she is paying the institute, according to the contours of the scheme. Loans taken from any bank under the Indian Banks' Association will be eligible.

...The scheme assumes significance in the wake of premier educational institutes like Indian Institutions of Management (IIMs) announcing a sharp hike in fees.

Growth in education in management, medicine and engineering is being driven by private institutions. So, having a concessional education scheme is a good idea. However, the availability of concessional education loans does not mean that there is a case for steep fee hikes in public institutions.

First, the principal amount still has to be repaid. Second, if the state is provide some subsidy in public institutions, it might as well do so directly through lower fee. Why go through the cumbersome route of raising the fee and then subsidising the loan that would be required?

It could be argued that when fees are pegged a low level in public institutions, that is not good for their finances. Not true. The government can compensate for lower fee through direct grants. As I said, no need to involve banks.

Two other points are worth making. One, fees in state-run universities in the US are lower than those in private universities even though the US has an excellent student loan scheme. Two, even with a concessional loan scheme being available, private universities have a subsidy element built into the fee- this subsidy comes from private endowment.

In other words, it would be incorrect to say that once a concessional educational loan becomes available in the country, that is a signal for institutions, private or public, to charge what the "market can bear". There are huge externalities to higher education- public benefit exceeds private benefit. So, there is always a case for not recovering the cost of education in full.