Student debt in India: Risk management lessons and early warning signs from a global crisis

As India emerges as a global higher education destination under the National Education Policy (NEP) and initiatives like Study in India, it must not ignore the warning signs from abroad. The cost of undergraduate and postgraduate education is rising, and more Indian students are funding their studies through debt. If not properly managed, this trajectory could mirror the crises witnessed in the US and the UK, threatening not just financial institutions but the economy and society at large.

This article explores India’s student debt landscape, draws insights from global education hubs, and outlines urgent risk management strategies to prevent a systemic crisis.
India’s Higher Education Boom — and the Financing Risk

India is strategically advancing its position as a global education hub by permitting foreign universities to establish campuses and by fostering transnational academic collaborations. Concurrently, national efforts to enhance Gross Enrolment Ratios (GER) and scale digital and blended learning modalities are reshaping access to higher education.

However, this expansion must be underpinned by robust financial inclusion mechanisms. In the absence of well-structured scholarship frameworks, means-tested subsidies, and comprehensive financial literacy initiatives, the proliferation of unsecured education financing — particularly through non-banking financial companies (NBFCs) and fintech platforms — risks exacerbating household indebtedness and creating a systemic student loan crisis.

As India aspires to lead globally in higher education, it must proactively incorporate safeguards to prevent the replication of student debt trajectories observed in other advanced economies, where regulatory gaps and overleveraging have compromised long-term financial sustainability and socioeconomic mobility for graduates. 

Understanding India’s Student Loan Landscape

Compared to the US or UK, India’s student loan market is still nascent but growing rapidly. Education loans outstanding in India are on the order of tens of thousands of crores of rupees (several billion dollars). These loans are offered by public sector banks, private banks, and specialised non-banking financial companies (NBFCs). In addition, many students resort to personal loans or other means to fund education when they don’t qualify for formal education loans.

The growth in student loans is attributed to rising aspirations for foreign degrees, tuition inflation, and easy access to unsecured loan products. While this widens financial inclusion, it also raises significant concerns about asset quality and repayment assurance. It’s important to break down the types of loans used for education in India and their risk profiles:

• • Formal Education Loans vs. Personal Loans: Banks typically offer education loans specifically earmarked for tuition and related expenses. These often come with features like a moratorium (no repayments during the study period) and sometimes interest subsidies. However, not everyone can access these – for instance, if the course or institution is not on approved lists or if the borrower lacks a co-signer. In such cases, students or parents may take out personal loans to finance education. Personal loans usually carry higher interest rates, shorter repayment periods, and no automatic moratorium, making them riskier for student borrowers. Using a costly personal loan to pay for college can increase the chances of default if the student doesn’t secure a good job immediately after graduation.
  • Secured vs. Unsecured Loans: Education loans in India can be secured (backed by collateral such as property or fixed deposits) or unsecured. Typically, banks require collateral for higher loan amounts (e.g. loans above ₹7.5 lakh often need collateral), while smaller loans may be unsecured but require a parent or guardian as a guarantor. Secured loans mitigate risk for lenders – in case of default, the collateral can be seized – but they raise the stakes for families, who could lose vital assets. Unsecured loans rely on the future earning potential of the student and the creditworthiness of the co-signer. In recent years, fintech lenders and NBFCs have been aggressively expanding unsecured education loans, sometimes even offering “no collateral” loans for expensive overseas programs. The danger is that if a student’s expected income doesn’t materialize, these unsecured loans can quickly turn into bad debt. NBFCs are aggressively capturing market share in education lending, especially for overseas studies. As per a 2024 CRISIL Ratings report, education loan AUM of NBFCs is expected to grow from ₹43,000 crore to ₹60,000 crore by end of the fiscal, representing a staggering 40–45% year-on-year increase. The increasing dependence on unsecured loans with minimal credit screening – often without co-borrowers or collateral – makes this growth highly vulnerable to default shocks if graduate employability falters. 
  • Non-Performing Assets (NPA) in Education Loans: Worryingly, student loans in India are already showing high default rates. By 2022, education loans had one of the highest NPA ratios among all retail loan categories. This means nearly a tenth of education loan borrowers are unable to repay on time – a red flag for lenders. Industry analyses have noted that education loan NPAs are the highest in the retail lending segment, indicating the stress students and families are under in meeting repayment obligations. Such levels, if they persist or worsen, could make banks more cautious to lend for education and even threaten the financial stability of lenders heavily exposed to this segment. According to a 2024 RBI report, while India’s overall gross non-performing assets (GNPA) have declined to a 12-year low of 2.8%, the education loan segment continues to stand out with disproportionately high stress. Though the GNPA in education loans reduced from 5.8% in March 2023 to 3.6% in March 2024, and further to 2.7% by September 2024, it still ranks among the highest default rates in the retail segment. This signals that student debt remains a structural risk, especially given the growing complexity of lending models and aggressive expansion by NBFCs into education financing. 

The impacts of student loan defaults extend beyond just banks’ balance sheets. When a borrower defaults, the bank or NBFC must write off the loan as a loss (after exhausting recovery options), directly affecting its profitability. If defaults mount, lenders may curtail new loans or raise interest rates to compensate for risk, making education financing costlier for everyone.

Moreover, defaults affect the borrowers’ families – a default can ruin a young graduate’s credit score before their career even begins, limiting future access to credit (for example, to buy a home). On a macroeconomic level, widespread student loan defaults can dampen consumer spending and entrepreneurship; heavily indebted graduates may postpone buying homes, starting businesses, or even starting families, which in turn affects economic growth. In summary, unchecked student debt can create a drag on the broader economy, not just a problem for the lending institutions.

The US Student Debt Crsis — A Cautionary Tale

With outstanding student debt surpassing $1.77 trillion by late 2024, the US provides a textbook case of what happens when lending outpaces employment outcomes.

• • Skyrocketing Defaults: Nearly 1 in 4 borrowers defaults at some stage. Dropouts, students from for-profit institutions, and those in low-paying fields are especially vulnerable.
  • Macroeconomic Drag: Student debt is correlated with delays in home ownership, car purchases, family formation, and entrepreneurial ventures — all critical components of economic growth.
  • Political Backlash: President Biden’s loan forgiveness attempt was blocked in 2023, yet it underscored the crisis’s scale. President Trump’s dramatic attempt to dismantle the Department of Education shows how unmanaged debt can become a national flashpoint.

The US experience illustrates how student debt can evolve from a personal finance issue into a systemic economic and political challenge. or India, the takeaway is that ignoring early signs of a student debt problem can eventually provoke extreme solutions or political instability around higher education financing.

The UK Model — Safer for Borrowers, Riskier for the State

The UK uses income-linked student loan repayments, where borrowers pay a percentage of their earnings once they cross a threshold, and any remaining balance is forgiven after 30–40 years. While this shields individuals from default, it has created a ballooning liability for the government. By 2024, the UK student loan book exceeded £220 billion. Some eye-opening data emerged in 2024 through a BBC investigation: thanks to accrued interest and long repayment periods, many UK graduates owe shockingly high amounts.

Some recent graduates had debts over £100,000, and one former student’s balance had ballooned to £231,000 despite repayments. In fact, about 1.8 million people in the UK owe £50,000 or more in student loans, over 60,000 borrowers owe above £100,000, and dozens even owe over £200,000. These figures highlight how compound interest and expensive programs (like medicine or lengthy postgraduate studies) can lead to enormous debt burdens, even in an income-contingent system.

The lesson for India is the importance of realistic loan terms and graduate earnings. If a large share of students are borrowing amounts that their post-education incomes cannot service, the system is unsustainable. Either defaults will spike (in a system like India’s) or the government will eat the loss (as in the UK’s model). Neither scenario is desirable.

Global Insights from Other Education Hubs

• • Europe (Germany, France, Nordics): Low or no tuition fees reduce the need for education loans. Public investment upfront avoids downstream debt burdens.
  • Australia: The HECS-HELP system links loan repayment to tax income. This reduces defaults but has created inflation-indexed debt overhangs.
  • Emerging Markets: Countries like South Africa and China are seeing rising student loan defaults due to graduate unemployment — reiterating the importance of linking education with employability.

Why Student Debt is a National Risk

• • Banking Sector Stress:
    
    Elevated student loan delinquencies increase non-performing asset (NPA) ratios, necessitate higher capital provisioning under regulatory norms, and erode profitability. In the case of public sector banks, sustained stress may trigger the need for government-led recapitalisation, placing fiscal pressure on the exchequer.
  • NBFC and Fintech Exposure:
    
    Non-Banking Financial Companies (NBFCs) and digital lenders with significant exposure to unsecured education loans face heightened credit risk and potential liquidity mismatches. A deterioration in asset quality could precipitate broader financial contagion, particularly in an interconnected credit ecosystem.
  • Dampening of Consumption-Led Growth:
    
    Indebted graduates with constrained disposable incomes tend to defer essential life-stage expenditures such as housing, healthcare, and entrepreneurship. This prolonged debt overhang suppresses aggregate demand and undermines GDP growth in a consumption-driven economy.
  • Human Capital Flight:
    
    Excessive financial burden may incentivise high-potential graduates to migrate in pursuit of superior earning prospects abroad. This exacerbates brain drain and undermines the long-term dividends of domestic investments in education and skill development.
  • Societal Disillusionment and Erosion of Trust:
    
    When educational outcomes do not translate into employability or upward mobility, and debt burdens persist, it breeds systemic disenchantment. The erosion of public trust in the higher education-finance nexus could manifest in civic unrest or reduced institutional credibility.
  • Retrenchment in Higher Education Access:
    
    Increased credit risk leads to tightened underwriting norms and risk-averse lending behaviour by financial institutions. This, in turn, restricts access to financing for future cohorts and adversely impacts institutional viability through lower enrolments, fee caps, and funding constraints.

Certainly. Below is a more mature, technical, and risk-expert-level redraft of your “Six Recommendations to Avert a Crisis” section:

Strategic Recommendations to Mitigate Systemic Risks from Student Debt

1. Risk-Based Lending Frameworks for Banks and NBFCs
   
   Financial institutions must adopt a structured, risk-calibrated approach to education financing, moving beyond uniform credit underwriting models. Key imperatives include:

• • Integration of institutional quality metrics, placement rates, accreditation status, and course-level return-on-investment (ROI) into lending decisions.
  • Loan ceilings for courses or institutions with low employability outcomes or lacking regulatory recognition.
  • Introduction of minimum collateralisation or credible guarantor requirements even for sub-threshold unsecured loans deemed high-risk.
  • Creation and periodic updating of a centralized database of eligible programmes and institutions approved for lending.

2. Strengthened Bank–Academic Institution Risk-Sharing Mechanisms
   
   Enhancing lender-institution partnerships can mitigate information asymmetry and enable early-warning systems. Recommended practices:

• • Formal data-sharing protocols covering dropout rates, academic performance, and placement statistics.
  • Establishment of joint risk-pooling or guarantee funds where institutions bear a portion of default risk, incentivising outcome accountability.
  • Piloting of Income Share Agreements (ISAs) where repayment is pegged to post-graduation earnings rather than fixed EMIs.
  • Career services teams must co-create post-disbursement support pathways with lenders to prevent loan distress through employability interventions.

3. Licensing and Regulatory Oversight for Education Loan Intermediaries
   
   Analogous to SEBI’s regulation of financial influencers and NHB’s licensing of housing finance entities, India must establish a statutory licensing regime for education loan distributors — particularly edtech and fintech aggregators. Objectives include:

• • Curtailing predatory lending and aggressive product pushing through regulatory scrutiny.
  • Mandating standardised disclosures and consent protocols for all education finance products.
  • Assigning fiduciary responsibility to counsellors, financial advisors, and loan-selling platforms operating in the student finance ecosystem.

4. Regulatory Safeguards for Edtech Financing Schemes
   
   In light of the exponential growth in non-accredited, high-fee digital learning programmes, a dedicated regulatory framework must be instituted for edtech-linked financing. This should include:

• • Disbursal eligibility only to regulator-recognised and outcome-validated courses.
  • Due diligence by lenders on student completion rates, post-course employability, and refund policies.
  • Imposition of lending caps for non-degree and upskilling programmes.
  • Mandatory informed consent protocols, ensuring clarity on EMI obligations and credit implications before disbursal.

5. Governance of “No-Cost EMI” and Embedded Finance Structures
   
   Zero-interest EMI products marketed in educational contexts must be brought under the ambit of mainstream lending regulations. Priority actions include:

• • Mandatory declaration that such schemes constitute formal credit arrangements reportable to credit bureaus.
  • Threshold limits on loan quantum and tenor for non-academic or short-term courses.
  • Enforced creditworthiness assessments, including income verification and guarantor due diligence.
  • Inclusion under the Reserve Bank of India’s digital lending guidelines, and grievance redressal mechanisms.

6. Expanding Risk Mitigation Through Scholarships and Loan Forgiveness Instruments
   
   A robust financial aid architecture is critical to preventing debt-induced exclusion and distress. Policy recommendations:

• • Public–private partnerships to expand the pool of merit- and need-based scholarships at scale.
  • Mandatory inclusion of credit life insurance for all education loans, covering death and permanent disability.
  • Structured loan forgiveness or income-contingent waiver programmes for graduates serving in critical sectors such as rural education, healthcare, and public administration.

India has the talent, ambition, and demographic dividend to become the next global education powerhouse. But that potential comes with responsibility. As seen in the US and UK, easy credit combined with unchecked tuition hikes can backfire — trapping students in cycles of debt and triggering political and institutional crises.

The good news? India’s student debt problem is still at a preventable stage. By strengthening regulation, introducing licensing, aligning education with employment, and demanding responsibility from lenders and institutions, India can chart a sustainable path. Let education remain a ladder to opportunity — not an anchor of lifelong debt. The time to act is now.

—The author, Hersh Shah, is Chief Executive Officer, IRM India Affiliate, the world’s leading professional certifying body for Enterprise Risk Management. The views are personal.