Determinants of Interest Subsidy on Education Loans in India: Who Gains and Who Loses?

By Rani, P. Geetha; Mukesh | Journal of Management and Public Policy, December 2017 | Go to article overview

Determinants of Interest Subsidy on Education Loans in India: Who Gains and Who Loses?


Rani, P. Geetha, Mukesh, Journal of Management and Public Policy


Introduction

The Government of India in its Union Budget 2009-10 introduced a supplementary scheme to provide interest subsidy during the period of moratorium to cover loans taken from scheduled commercial banks under the Educational Loan Scheme of the Indian Banks' Association (IBA). Department of Higher Education, Ministry of Human Resource Development, Government of India has launched this interest subsidy scheme with the purpose of helping the economically weaker sections with parental income of less than Rs. 0.45 million per annum. The details of the scheme include:

(i) Interest payable for professional courses for the period of moratorium (i.e., course period, plus one year or six months after getting job, whichever is earlier) is subsidised.

(ii) Interest subsidy is available to the eligible students only once, either for the first undergraduate course or post graduate degrees/diplomas or for combined post graduate courses;

(iii) It is not available for those students who either discontinue or are expelled on disciplinary or academic grounds but available for discontinuation on medical grounds; and

(iv) Students who availed interest subsidy will get one per cent concession in interest rates. The details of educational loan are given in annexure I.

Interest Subsidy on Education Loans

The basic objectives of an education loan program influence the choice and design of various parameters viz., choice of administering and funding agency; who is eligible to get the loan; security or guarantee required; loan amount covered - whether tuition or living or both expenses; rate of interest charged - a significant lever in deciding the subsidy; extent of grace and repayment period; repayment modalities: repayment incentives and waivers (Ziderman, 2002; Johnston, 2006; Chapman, et al. 2010). Of all these, interest rates and repayment modalities received much attention in the literature. The level, nature and size of interest subsidy depends on the basic objective of a loan program whether it aims at addressing (i) access and equity, (ii) cost recovery, (iii) expansion and (iv) easing financial burden (government or for students or both).

Interest rate is a significant parameter in deciding implicit subsidy. Usher (2005) while reviewing the global debt burdens in OECD countries suggest three basic approaches to deal with interest rates: 'zero-nominal' 'zero-real', and 'cost of government borrowing'. In the zero-nominal interest approach, loan does not grow in nominal terms for the duration of the study period. In real terms, the loan shrinks while the student is in school, reaps the largest government subsidy. No real interest is charged under the zero-real interest approach, but loans are allowed to grow with inflation so as to remain in constant value. This too enjoys a larger government subsidy but less than zero nominal type. But the interest rate is charged as per the cost of government borrowing, there is no subsidy.

In a similar vein, Asplund et al, (2008) in their review categorize three groups of European countries. In the Netherlands and the Nordic countries where the vast majority of students are entitled to take loans, students pay an interest rate that is close to the market rate, like 'zero-real'. In the Netherlands, whenever a loan is not converted into a grant, it has to be repaid subject to an interest rate that is around 2 per cent on top of the rate on long-term government bonds. So they cover the cost of government borrowing and hence there is no hidden grant to the student. In Germany, France and Italy, interest-free loans are targeted at students from low-income families. This is similar to the interest subsidy scheme in India, which is 'zero-nominal'. In Denmark and Finland, students pay all or some of the interest on their loans while studying, like 'cost of borrowing'. India adopts a similar approach for those students who are not covered under interest subsidy scheme. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Determinants of Interest Subsidy on Education Loans in India: Who Gains and Who Loses?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.