Education Loans: Yay or Nay?

In the time of financial uncertainties, education loans in India have stood out as an unexpected yet resilient asset class. While most loans come with varying degrees of risk, education loans have remained surprisingly stable and continue to thrive. What makes them so reliable? Why do they seem immune to factors that affect other sectors?

The answer lies in our society’s commitment to education, the growing need for skilled professionals, and a financial model that supports both individual and economic growth. In this article, we will explore the growth of education loans in India, why they’re a secure investment, and how the sector is outpacing inflation.

Low Penetration, High Growth Potential

India has approximately 58,000 higher education institutions according to Ministry of Educations’ AISHE FY2022 report. However, Gross Enrolment Ratio (GER) in higher education stood at only 28.4% in the same period, indicating that a large portion of eligible students do not pursue higher education.

Further, K–12 enrolment data reveals that enrolment in secondary and senior secondary schools stood at 80% and 58%, respectively. This highlights high dropout rates after secondary education, reducing candidates for higher education. The education industry is expected to grow at a CAGR of 12-13% between 2024 to 2029, with its market size exceeding Rs 24 trillion. This growth will be led by:

1. Education inflation to lead to increase in spending
2. Expansion of the e-learning market and rise in demand for upskilling
3. Implementation of National Education Policy (NEP) 2020

Despite this rise in demand, the education loan market remains underserved. Currently it is at 11-12% among students pursuing higher education and is projected to grow to ~13% by 2028. In fact, education loans made up only 1.2% of NBFC credit in FY24.

With limited specialized players and products tailored to different student needs, this market is less than penetrated. More financing options can bridge the demand-supply gap and unlock the potential of this sector.

Resilience to Inflationary Pressures

Unlike discretionary spending, education is considered a necessity, making it relatively immune to economic turn of events. Parents and students are willing to invest in education regardless of rising costs. The cost of education has been outpacing general inflation.

For instance, from 2017 to 2022, private spending on education grew at 6.9% annually, outpacing overall inflation, which averaged 4.7% over the same period. Notably, in FY 2022, education spending surged by 15.7%, further highlighting the importance of education. Even in challenging economic conditions, families prioritize education, ensuring continued demand for financing solutions.

Strong Asset Performance and Low Default Rates

Education loans have demonstrated low credit costs and NPAs, making them a safe lending category. According to CRISIL, education-focused lenders have reported strong portfolio performance:

The default rates on education loans remain lower than other retail loan segments, such as personal loans and auto loans. This is because:

1. Education drives income growth and better livelihoods.
2. Studying at a top college or abroad is a status symbol, and people fulfill their financial obligations to maintain it.
3. Education loans offer structured repayment moratoriums, aligning payments with future earning potential.

Education loans are an attractive asset class due to their low-risk nature, resilience to economic downturns, and strong repayment rates.

With increasing higher education enrolments and an underserved financing market, this sector offers significant room for growth. As people recognize the stability and potential of education loans, the segment is poised to grow with specialized products and players.

Authored by Mahak Rajgarhia