3 years ago

Why student loans still don’t work in Bangladesh

An illustrative image — FE
An illustrative image — FE

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Many meritorious students of Bangladesh miss out on opportunity to fulfill their dreams of pursuing higher studies for building a better future due to financial insolvency of their families and lack of scope to arrange funding in the form of loan.

Up to the higher secondary level, Bangladesh’seducation system is fairly subsidised. But when it comes to tertiary education, there are only a few public universities against the ever-increasing number of students. Many of the students, who do not succeed in public university enrolment tests, have to opt for private universities that charge higher fees.

In still a low-income country like Bangladesh, only a handful of families can afford to meet such cost of education.

In this scenario, education loans are often recommended as a solution,which is in fact not so available to those who are in actual need.

Several banks offer education loans ranging from a minimum of Tk 100,000 to a maximum of Tk 2.0 million. In an idealistic world, education loans should be given to the bright students who cannot afford higher education.

However, in a not-so idealistic sketch, these loan plans are mostly molded around income of the parents, not intellectual promises of a student. Banks require collateral or a guarantee that the loans shall be repaid.

In most cases, students need a security deposit or their parents to have at least a fixed monthly income of Tk 25,000 to be eligible for an education loan. This, a private banker admits, is one of the major obstacles most of the prospective clients face while trying to finance their education. Often, the income of the students’ parents does not meet the requirements, resulting in a rejection of their applications.

Shifting to the other side of the scenario, the banking sector considers education loans as extremely risky and uncertain because banks do not have a way to retrieve their money from the borrowers. Lack of database of students in Bangladesh is found to be a major barrier to execution of such a loan programme.

Education loans are common in developed countries such as the USA, Australia, and Canada,thanks to their secure database with all the necessary information about students, and the loans are guaranteed by their federal government. Database makes it easy for them to track down borrowers and recover the money later on. “There is no applicable system in place for retrieving the loans from delinquent students. If the banks have to employ more people just to keep track of the students, it will not be financially viable,” said an official from a state-ownedd bank.

Another barrier to student loan is uncertainty of employment and a highly volatile job market in Bangladesh. Hundreds of thousands of fresh graduates who are coming out every year entering the job market are all not accommodated. Even securing jobs many poorly-paid young graduates are not in a position to repay the loans soon.

In developed countries, banks can provide loans solely based on students’ merit as job prospects are available. When a bank gives out a loan, the main factor in consideration for them is whether the loan recipient has the ability to repay it. Unlike other financial schemes financed by the banks, education loans do not have such specific repayment structure due to unpredictability of the job market.

Bangladeshi students are aware of this uncertainty in securing education loans.

JannnatulMawaUrme, a first-year student in Islamic University Bangladesh, once decided to take a loan to study at a private university and payit back herself when she gets a job. However, she said, she realised the harsh reality after visiting some banks for information. According to her calculation, if she takes a loan of Tk 500,000 for her tuition fees, her debt will almost be double with interest, by the time she graduates and gets a job in five years. Even if she manages to get a first-class government job, her salary will not be enough to repay the debts soon enough. Rather, she may throw her into a debt spiral.

A crushing debt is the last thing a fresh graduate wants, be it in Bangladesh, or even the United States.

“A bilateral agreement between a university and a bank could be a way to mitigate the risk of education loan to a certain extent,” said a state-owned bank official. If the university and the bank come to an understanding, the university can workas a facilitator of its students’ loan and can guarantee repayment on the students’ behalf.

This is similar to how housing firms often facilitate home loans for their clients through a bilateral contract with banks. In that case, the university has to ensure job placements for the students who take the loans. That is really a difficult task given the huge population of students and higher unemployment rate.

The government and the banks may work together to procure a feasible solution to reduce the risk of education loan defaults and unemployment. Mitigating the risk would also enable the banks to charge less interest on students.

Making education loans more accessible will not only enable the students to pursue their dreams but also be a crucial investment in developing the human capital.

Khandakar Iffah is currently an undergraduate student of Economics at Dhaka University.

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