Education Loans: What is a good collateral

Most discussions on how to improve quality of education start with the suggestion that the colleges be allowed to charge a much higher fee than what they are being allowed currently. And immediately, someone will point out that our citizens cannot afford the cost of quality education. Predictably the discussion moves on to bank loans. While in theory, educational loans till Rs 4 lakhs are without any collateral, and easily given, in practice, students keep complaining about banks' reluctance to provide the loan to students from financially weaker background. Apparently, the default in education loans is rather high, and banks feel comfortable giving loans to only students of highly reputed institutions, or those who has a guarantor or a collateral.

One way out of this problem is to have the degree itself as a collateral. When the student applies for bank loan, there can be a tripartite agreement between the student, the bank, and the educational institution. The educational institution agrees that any certificate/diploma/degree/marksheet, etc., that the institute will give to the student will have a line that the student has not yet completed the loan repayment, and only after the bank informs the institute that it has been fully paid that the institute will provide a degree (or diploma, etc.) which will be "clean," that is, will not have any mention of the unpaid loans.

Assuming that the students will be very keen to have a clean degree, they will try their best to clear the dues. At any stage in life, some employer may insist that they have a clean degree (and hopefully, a lot of employers will insist that at middle level or senior level, all degrees be clean).

And if all students can be given Aadhar number on priority basis, and their degrees and certificates can be put in a national depository (as is being planned by the government) so that any employer or stake holder can look at the status of the degree, then it will not be possible for students to fake a clean degree.

Of course, this does not solve the problem fully. Some students will fail the course and never get a degree. Some students will go abroad where employers may not care about the loan, and, of course, even Indian employers may not care about this line. Also, if one is self employed, then one can ignore having a clean degree. But all these cases put together are still a small part of the graduate community, and the scheme will, I hope, improve the loan recovery by banks. And that will encourage banks to increase the amount disbursed as educational loans, and also reduce the interest rates a bit.