Funding education

The West Bengal government recently announced a Student Credit Card (SCC) scheme that will offer collateral-free student loans up to ₹10 lakh at an annual (simple) interest rate of 4 per cent with a repayment period of 15 years. Students can utilise several benefits under the scheme until 40 years of age.

To get financial assistance to cover course and tuition fees, books and courseware costs, hostel fees and pecuniary expenses, the eligible students need to meet some pre-specified criteria. The avowed goal of the scheme is to ensure that financial constraints do not deter deserving students of the State from pursuing higher education. The scheme also covers students preparing for various competitive examinations.

With its liberal repayment terms, the scheme is expected to provide a fillip to students who plan to pursue higher education from undergraduate to doctoral/postdoctoral studies.

Chief Minister Mamata Banerjee proclaimed that the SCC scheme is a novel idea that can mitigate the financing burden of higher education. The idea, however, is not new, many banks and NBFCs offer similar benefits at nominal interest rates.

Less documentation

Student credit cards do not require lengthy documentation and proof of income. So, there can be credit (default) risk for the lender in the absence of tangible/intangible collateral. This type of credit card is tailor-made to serve the needs of college-goers — allowing them to manage funds and meet expenses in a less complicated manner.

SCC offers various incentives such as cashback and discounts and handsome reward points that one can redeem for coupons and merchandise.

The credit limit of SCC should be kept low at, say ₹30,000–50,000, with a validity of five years to check reckless spending.

There is also a need to focus on the accessibility, awareness and acceptability of the SCC scheme.

For example, the costs of skill-oriented education have risen sharply. Will ₹10 lakh be enough to bear the inclusive costs? May or may not, as it depends on the aptitude of students to pursue higher education in different streams and their employability.

Roughly ₹16-17 lakh would be the repayment amount a student needs to bear if the default rate is not considered.

A key concern is the likelihood of gainful employment and capacity to repay the credit outstanding in the stipulated repayment period, including moratorium. This is deeply rooted in credit discipline that includes financial literacy among the youth.

While it is too early to comment on the performance of this SCC initiative, the absence of complementary interventions, such as an expansion of avenues available for quality education in various streams through bridging infrastructure, skilled human resources, and equipment deficits can affect the implementation of the scheme.

A robust mechanism for checking corruption and loan diversion needs to be designed at the behest of State government and a resilient system should be put in place to avoid financial distress to lenders and students’ parents who will be co-borrowers of the scheme.

The SCC scheme should not become a mechanism for political patronage at the cost of the exchequer and financial health of the lending institutions. It is, therefore, necessary to ponder over what other alternatives exist to further the goal of affordable quality higher education in the State as well as in India.

The scheme also raises the sustainability concern of (loan) financed education and social costs of privatising education which otherwise is a public good.

Kumar is doctoral student, and Dey is faculty, IIM Lucknow. Views are personal.

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