The major expectations of governments with regard to student loan programmes are: (a) huge funds can be mobilised in a short time, with the repayments of loans by the graduates, (b) governments can do away with budgetary allocations for higher education and eventually withdraw from financing higher education and (c) higher education can be made self-financing with the revolving funds.

The student loan programmes are also based on several unrealistic assumptions: (a) demand for higher education will not get adversely affected; (b) poor will have enough access to loans and thereby to higher education; (c) loan amounts can be fully recovered in a reasonable period; and most importantly (d) well developed education credit markets exist in the developing countries. Further, it is also implicitly assumed that strong links exist between education and employment in the labour markets in the developing countries.

The concept of student loans has a strong appeal. (a) Student loans are regarded as ‘equitable’ as they appear to hold out the promise to the student that ‘you can borrow money when you cannot pay for higher education on your own and repay when you can’. That is, access to higher education is not restricted by the inability to pay. (b) Student loans are considered an ‘efficient’ mechanism of mobilisation of resources, as they have a huge potential of generating the badly needed financial resources from the ‘direct beneficiaries’ of higher education. (c) Governments in developing countries can save huge public expenditure on higher education and reallocate it in favour of primary education. Other arguments are also made in this context, which are also generally made in case of private financing, such as (d) student loans not only increase access to higher education but also, more importantly, reduce regressive distribution of public resources; (e) they prevent wasteful expenditures as only the needy will take loans; and (f) student loans improve internal efficiency as students with loans would be ‘diligent’ and more serious about their studies.

The experiences of many developing and developed countries in the past has shown that these are elusive gains. The experience has also shown that there are serious weaknesses associated with the student loans. (a) The experience of countries with regard to recovery of loans is very poor. Several studies of the World Bank and others have shown that the highest rate of recovery was 67 per cent in Barbados, but in many countries it was below 40 per cent, and in some countries the rate of recovery was in fact negative as the real rates of interest were low and even negative. It was estimated that it would take 14 years to recover 50 per cent of the loan amounts in advanced countries such as UK. Cost of administration of loans is very high, if not prohibitive, in some countries. It was also found that launching of student loan programmes in developing countries require huge initial funds (e g, an estimated Rs 3,000 crore in India for higher technical education). Access to loans is guided more by the ability to repay (measured in terms of mortgages, security and collateral arrangements for repayment) than either by educational merit or by economic need of the students. As a result, the loans turn out to be highly regressive, severely restricting the access of the poor to higher education. Student loans could also be a deterrent to women’s access to higher education. Huge loan burdens may not necessarily make students more diligent and serious and may in fact contribute to growth in some avoidable social problems including mental stress and suicides. Finally, the psychological factors associated with student loans cannot be ignored. The risk and uncertainty associated with higher education would make people psychologically reluctant to take loans for higher education.

Apart from the practical gains and losses – wherein the latter seem to outweigh the former – the concept of student loans is based on a dangerous philosophy. It is based on the principle that ‘he (she) who benefits from higher education must pay’. The principle is based on a very narrow view of the ‘beneficiaries’ of higher education. It is not only the students, but also their families, the employers, the government, and the society at large who benefit from higher education. The ‘externalities’ associated with higher education, including ‘dynamic’ externalities, are acknowledged to be huge.

While private financing of higher education shifts the responsibility from the government and student fees shift the responsibility to households, student loans shift the responsibility entirely to individuals – from parents to children – which might in the long run weaken family bonds. Generally the present generation makes investments for the benefit of future generations. The philosophy of student loans is: let future generations invest now for their own future. The present generation need not take any responsibility of the future.

In short, the philosophy of student loans does not recognise the ‘social’, ‘public’ (or quasi-public) and ‘merit good’ nature of higher education. It treats higher education like any private good and education financing and, say, car financing are treated in the same way. That higher education is an indispensable intellectual social investment is no more regarded valid.

The concept of student loans does not also recognise the uncertainty of the relationship between higher education and jobs. It is wrong to assume that the link between higher education and occupations is either perfect or even strong.

To conclude, the concept of student loans for higher education has inherent weaknesses, as it does not recognise the basic character of higher education, its philosophy is dangerous for society, the gains claimed are elusive, the assumptions behind it unrealistic and, empirically, it has not proved to be a feasible solution to the problem of inadequate resources for higher education nor an antidote to the regressive effects of increases in fees. It may indeed be a deterrent to the growth of higher education.