Stemming the Student Loan Crisis: A Lesson From India

Published

August 22, 2011

Farnoosh Torabi is a nationally recognized author, expert and television host. Her first book, You're So Money, is an acclaimed tell-all for young adults searching for financial independence. Her new book Psych Yourself Rich, gives readers the mindset and discipline to build their financial life.

Sometimes it helps to look beyond our borders for solutions to the troubled messes at home. As we know, student loans outstanding total roughly $830 billion in the U.S., more than total credit card debt. More alarming is the fact that many student loan borrowers are in default and unable to repay. Recent data obtained by the Chronicle of Higher Education found that 20% of federal student loans that entered repayment in 1995 have since gone into default. Another study concludes only 37% of college graduates in 2005 have been able to pay their student loan bills on time every month.

[Related article: Student Loans: The Next Bubble to Burst?]

India has its fair share of problems with student loans, as well; this year alone, the country reported a 45% rise in bad loans. To help control matters, Indian banks want to grade educational institutions based on the efficiency and repayment history of their students, according to Mint, a daily newspaper in India. In effect, colleges and universities with low ratings—as well as their prospective and current students—may be banned from the student loan market. In other words, if you want a loan from College A, where 50% of students have defaulted on their education loans, you may very well face rejection.

[Related article: Student Loan Default Realities]

Is this fair? Not entirely. Some prospective borrowers with good intentions of graduating, securing work and paying down their student loans may suddenly find themselves limited and unable to secure financing from lenders because the schools they’ve chosen to attend are on the “Do Not Lend” list.

But the proposed requirement—which still needs approval from the Indian Banks’ Association—may be worth the attention of American lenders and even the U.S. federal government, which doles out the majority of student loans.

For one, this rule would place more pressure on universities to see their students graduate and help them secure work upon graduation—the promise they make in their brochures and during campus visits. In theory schools that fail to improve may see a drop in applications and eventually go out of business. “The move is a right step as many colleges in India are not outcome driven,” said Bharat Gulia, senior manager of education practice at Ernst and Young India told Mint. Secondly, the ratings system would [hopefully] makes students think more critically about the cost of college, how to best afford it, and which institutions will provide the greatest return on investment.

[Featured tool: Get your free Credit Report Card from Credit.com]

Image: Bill S, via Flickr.com