Educating India’s young population

By providing collateral-free, guarantor-free education loans, and interest subventions by income level, the scheme aims to cover over 22 lakh students (roughly 22% of all students enrolling in colleges each year) enrolling in the top 860 higher education institutions — across private, state-run and centrally governed institutions — based on the National Institutional Ranking Framework (NIRF). Students who apply for a loan amount up to ₹7.5 lakh will be eligible for a credit guarantee of 75%. Students with a family income of up to ₹8 lakh who are not eligible for benefits under any other government scholarships and interest subventions, will receive a 3% interest subvention for a loan amount up to ₹10 lakh during the moratorium period. The interest subvention is set to support one lakh students every year, with a preference for students from government institutions who opt for technical or professional courses.

This intervention is in addition to the PM Uchchatar Shiksha Protsahan Central Sector Interest Subsidy (USP CSIS) Scheme where students with an annual family income of up to ₹4.5 lakh, pursuing technical or professional courses from approved institutions, get full interest subvention for education loans up to ₹10 lakh during the moratorium period.

The scheme stands out for three reasons. First, it democratises access. Getting student loans has long been a big challenge due to high rates of interest, limited coverage and heavy requirements for collateral, earning co-applicants and credit scores, along with inconsistent practices prevalent across banks and financial institutions. By reducing financial constraints to prioritise merit and excellence, the Vidyalaxmi scheme enables a student’s basic, rightful access to the best institutions in the country. Financial burden not only restricts a student’s monetary independence but also limits their social and psychological freedoms and constrains an individual’s sense of the world. That is a costlier burden for a nation to carry if it wants to maximise productivity and ensure that people lead meaningful lives.

Second, the Vidyalaxmi scheme empowers young students to set aspirational goals. Beyond providing financial ease and predictability, the scheme is an effort on the part of the government to nudge students, families and communities to pursue higher education with greater confidence and dedication. Students must lead their lives with choices that are informed by their interests. Good quality education opens that door for them. The scheme ensures that financial support is targeted at credible and high-quality institutions and not misdirected or misused.

High-performing institutions promise exposure to a wider set of opportunities, offer choices to students to realise their full potential, and enable them to receive support from an otherwise difficult-to-reach network of peers, mentors and professionals to ultimately make more conscious career decisions. In this sense, the Vidyalaxmi scheme is a loud recognition for higher-ranking institutions and a clear call-out for other institutions to compete for quality and grow beyond a degree-granting machine.

Third, on a national level, the scheme is an effort to channel the productivity of the growing young population and invest in the country’s natural social capital. India is home to the largest young population in the world, with over 40% of the country’s 1.45 billion people being under 25. The median age in India is 28, while it is 38 and 39 in the US and China respectively. We have the world’s second-largest higher education system, after China. However, the demand from our growing population is increasing the burden on existing institutions. The NIRF rankings this year revealed that 52% of the top-ranked institutions are concentrated in just five states — Tamil Nadu, Karnataka, Maharashtra, Uttar Pradesh, and Delhi. Given that the gross enrolment ratio (GER) in higher education currently stands at 28.3%, the urgency to increase the supply of high-quality education institutions and enhance their pull factor haunts us now more than ever.

Interestingly, the Vidyalaxmi scheme offers a push and pull factor for students and institutions respectively. Its potential criticism could be that Indians are not a big fan of taking loans and that even when we do take loans, we are unable to repay on time. Even at differentiated interest rates, loans remain a burden. However, recent reports on India tell us that the loan portfolio for domestic higher education has increased at an average of 2% year-on-year since 2019, reaching ₹678 billion in the 2023 financial year.

What we (must) realise is that enrolling in higher education is still predominantly seen and experienced as a personal affair for families, with personal savings and personal loans being considered the first avenue to finance a child’s higher education. The government’s intervention, then, becomes critical to alleviate such personal pressures.

Higher quality institutions also ensure better outcomes for students in terms of jobs and careers which enables them to repay on time. Indian School of Business (ISB), which is India’s premier business school, is a case in point. Since its founding year in 2001, the institution has offered students the option to avail collateral-free loans through its bank partners and has experienced not a single case of default from any student availing such a loan provision. While ISB may be an outlier, it goes to show that institutional excellence can unlock a virtuous cycle of students taking loans and being able to repay on time.

So, is the current scope of the Vidyalaxmi scheme enough? Perhaps not. But this is just the beginning. And a great starting point. Done right, it could be a game changer.

Pramath Raj Sinha is founder and chair of the board of trustees of Ashoka University and founding dean of ISB.The views expressed are personal