Rising Cost of Education: Banks Exploit, Colleges Ignore Sluggish Job Market

By Rishabh Agarwal

I still remember my school days when tuition fee was the last thing a student had to worry about – students were focused simply on getting into the best college. The fee for courses such as B.Com. or B. Sc. or B.A. at Universities in India was very low and easily affordable. It was somewhere between Rs 1,000 to Rs 10,000 annually for a graduate level course.

Then came the boom in engineering and MBA courses across India. Private engineering colleges popped up everywhere. With a billion strong population, a large part of it young, the demand for professional courses in engineering, management, medical, fashion, CA etc went through the roof. The maximum number of students got attracted to engineering and MBA courses.

IITs, NITs, IIMs, AIIMS, NIFT – the craze for admission into these institutes was near madness.

Realizing the student’s ability to pay, colleges in the name of providing better infrastructure and maintaining their autonomy, started increasing tuition fees by leaps and bounds. Many of these top institutes are today out of the reach of at least the lower middle class in India. And this fact is very troubling and disturbing.

Many of the top institutes in India are today out of the reach of at least the lower middle class in India

The Indian economy was doing well from 2002 to 2008 and no one objected to this increase in tuition fees. During the time of the first NDA govt. (1999 to 2004), the authorities noted this increase and rightly objected to it, but this came at the twilight of this government’s tenure. 

Predictably, institutes opposed and made huge hue and cry on this move. The NDA didn’t come back to power in 2004 and institutes were now free to go ahead with their plans as the next govt. under UPA saw no problem with sky high tuition fees.

In 2006, the tuition fees at IIMs was about 4 lakhs INR for the two-year PGP programme but then it started increasing sharply year on year. At the same time privately funded B-Schools such as Indian School of Business, Hyderabad were charging almost 22 lakhs INR for their one-year MBA course.

Seeing the potential of students to pay hefty fees for a prestigious tag and in the name of the so called ‘great placements’, the fee at IIMs reached an all time high of anywhere between 12 to 24 lakhs INR by 2012 for various courses. A sharp increase of 3 to 6 times in a short duration of 6 years! It is noteworthy that placements remained flat during the same period.

The average placements at top B-Schools for their two-year course were in the range of 8-14 lakhs INR in 2006 and the figure was not very different in 2012. Placement took a hit during the economic slowdown and many students graduated without decent jobs and a few even without jobs. (yes…I am still talking of the scenario at the top 20 B-Schools in India.)

In recent years I have observed an increasing turmoil among applicants – they have started questioning the usefulness of such costly education. They ask these questions to alumni rather than to the govt. or institutes who are all benefiting from high fees

Interestingly IIM Lucknow acknowledged this fact, albeit in a low-key manner and reduced its fee from 12 lakh to 10 lakh about a year ago for its two-year PGP programme. However other colleges  failed to acknowledge the grave situation and kept on hiking the fee for their courses.

India has a population of 1.2 billion and there is no dearth of applicants. But in recent years I’ve observed an increasing turmoil among applicants – they have started questioning the usefulness of such costly education. They ask these questions to alumni rather than to the govt. or institutes who are benefiting equally from high fees.

The middle class in India always aspired to send their children to elite colleges but by the very definition the middle class has limited savings. In order to send their children to the best institutes, parents cut down on so called ‘luxury’ expenses such as annual vacations, or painting the house, or buying a car.

But even this is not enough. 90% of the students cannot afford huge tuition fees without education loans and banks are doing their best to milk them for all they are worth.

In order to grab a slice of the action, banks in India cleverly started offering loans at heavy interest rates of 11-14% without any collateral (security).

Initially the banks were not even allowed to offer collateral free loans for a sum greater than 5 lakhs INR, but they skewed the policy and started offering loans up to 25 lakhs INR in tandem with rising tuition fees.

The same people who want to to do something good in their lives and even for their nation through their hard work took on these heavy loans in the range of 10 to 25 lakh – many felt trapped. The market demand did not keep up with the dreams being sold – jobs started disappearing 2008 onwards

Colleges possibly didn’t want to go beyond the Rs 25 lakh fee limit as it could have raised more eyebrows and unrest among the applicants or might have become uncompetitive as compared to fees at foreign schools.

It is interesting to note that had banks not offered these collateral free loans to students, colleges would never have been able to raise their fees up to the crazy levels we see now.

It was a clever move on the part of the colleges and banks – the whole education loan business and education ecosystem started whirring but the victim was the common man.

Soon the same people who want to to do something good in their lives and even for their nation through their hard work took on these heavy loans in the range of 10 to 25 lakh – many felt trapped. The market demand did not keep up with the dreams being sold. The disappointing fact is that the jobs started disappearing 2008 onwards.

First the reason cited was a global slowdown. But the global economy recovered within a year. However in India, there was no sign of a rosy economy. Scams broke out during the second tenure of the UPA regime in India and investments in India hit an all time low. GDP growth rate fell from high of 9% in 2006 to 4.5% in 2012. The manufacturing sector growth remained flat or rather it was in minus. Suddenly there was a scarcity of high paying jobs. 

Education Loan interest rates range somewhere between 11 to 14%+ at most Indian banks. In contrast a home loan is offered at 10% and a car loan is offered at 8%. How can banks charge more interest rate for something as noble as education?

The bright guys who were passing out from top colleges with heavy education loans were now flummoxed about where they should go. A few chose the entrepreneurship route. But this phenomenon is limited to only very few, with probably only a 5% success rate. With a heavy loan which is almost equal to 10 years of any middle class family’s savings, students were literally forced to join sub-par jobs not matching their skills or aspirations.

It is troubling to see that an average Indian is paying heavy income tax and education cess under service tax, but when it comes to his or his children’s education, he again has to cough up heavy tuition fees with high bank loan interest rates even at top govt. institutes. Where are our taxes going? 

Education Loan interest rates range somewhere between 11 to 14%+ at most Indian banks. In contrast a home loan is offered at 10% and a car loan is offered at 8%. How can banks charge more interest rate for something as noble as education?

Compare this case with other countries. In Germany the tuition fees is highly subsidized by the govt. for both domestic and international students. In USA the education loan interest rate is 1-2% and easily available if you are national of USA or OECD countries, and on lenient terms to boot. A majority of students land pretty decent jobs after graduation if they are from a reputed institute. This is not true for India any more.

The role of banks smacks of opportunism. Education loan interest rates should be lower than that of car loans and house loans. (Image courtesy Mohallalive and Ecolizer)

Rishabh Agarwal is an MBA (PGPEX) graduate from IIM Calcutta. He is currently working as an Operations & Strategy Manager in the CEO’s office at Escorts.