Why Indian Banks Face Potential Losses on their Foreign Education Loans

Indians earning US and UK degrees face intense competition for work visas and jobs from fellow Indians

By Sunil Mani

Currently, several hundred thousand parents in India are nervously reviewing and signing documents for a loan to fund a daughter or son’s education at a foreign university.

Admission to a Master’s in science, technology, engineering, medicine or math, STEM, program in India is intensely competitive. Even, assuming the government could come up with the funds to double or triple the capacity of such programs, there is the much bigger problem of high unemployment, including among those with advanced STEM degrees. Many students view earning an advanced foreign degree, especially at a university in the United States and the United Kingdom, as a solution.

Most Indians who study abroad are not from wealthy families. So, they borrow $50,000 to $200,000 from banks and other lenders in India to pay the tuition fees, living expenses, and other costs, in the US, depending on whether they are pursuing one-or-two year-Master’s degree, at state or private universities. Indians studying in the UK borrow loans ranging from US $40,000 to US $90,000.

Parents and other family members, who often co-sign the loans, borrow from any willing lender: government-run and private banks, non-banking financial companies, and privately owned education-finance lenders such as Auxilo, Avanse and Credila. The lenders are attracted by the large size of loans, high interest rates, long repayment periods, and, f there is a default, their ability to seize homes and other real assets used as collateral for the loans.

Education-finance institutions such as Credila have lent an estimated Rs 60,000 crores, $6.1 billion, to students pursuing foreign and also Indian degrees. While there is no government or Reserve Bank of India data on foreign education loans, they are estimated to account for more than half of all education loans.

In theory, foreign education loans differ from most other forms of household borrowing since they finance investment in human capital, rather than immediate consumption. Up until the early 2000s, this was mostly true, especially for STEM graduates of globally reputed universities. They found jobs, especially in the US and UK, benefitting from relatively favourable immigration policies, demand for skilled workers, and far lower competition from fellow Indians. Most of them also did not have to take on large education debt.

However, since the mid-2000s, each year fewer and fewer Indian graduates have found jobs, including in the US and UK. This is due to work visa restrictions and more competition for jobs, especially from fellow Indians.

Recently, prospects for students from India finding a job in the US and UK have worsened; even more so for those with non-STEM degrees. In one case, of Indians graduating with a MS in Finance from a low-ranked university in the New York area, only one in twenty found a job in the US. The rest were forced to return to India with $65,000 or more in education debt.

Meanwhile, the foreign education loans Indians have to borrow keeps getting larger, due to rising tuition fees and living costs and the rapid depreciation of the Rupee. Even if they can find a high-paying job in India, upon their return, many of them will take more than twenty years to repay their foreign education debts.

Indeed, ironically, the reduced work visa and job opportunities for Indians earning foreign degrees is in part due to a sharp increase in their numbers. In 2024, more than 1.3 million Indians were enrolled in foreign universities. This is up twenty-five fold, from about 53,000, in 2000; and up seven-fold, from about 192,000, in 2010. Hence, the intense competition, among college graduates for jobs in India, is also occurring among Indians with degrees in foreign countries.

Yet, many Indian students continue to believe that a foreign degree, even a non-STEM one, is the key that will enable them to get a high-paying foreign job. In part, they are influenced by stories about the success of Indians, especially in the US, widely covered by the media in India.

The rising, large numbers indicate that most Indians pursuing foreign degrees are from mid-or-low tier colleges in India. Meanwhile, since the 2010s, several top students from India, including from the reputed Indian Institutes of Technology, are reluctant to incur large educational debts to study abroad.

Foreign universities, especially in the US and UK, face rising budget deficits. So, to try and bring in more revenues, they use aggressive strategies to recruit more students from India to grow their revenues. The tactics include teaser scholarships and paying consultants in India $10,000 for each student they help enrol.

In fact, students from India provide a sizeable portion of the revenues of advanced education institutions in the US and UK. In the 2024-2025 academic year, there were 363,000 Indians at colleges and universities in the US. That year, they spent at least an estimated $24 billion to study in the US. In the 2025-2026 academic year, there were around 98,000 students from India pursuing advanced degrees in the UK, who will spend at least $4 billion.

The government-run State Bank of India is the country’s largest lender of foreign education loans. It lends up to Rs 30 million, $320,000, with loans larger than Rs 0.75 million, $8,000, requiring homes or other real assets as collateral. Interest rates are floating, and vary according to benchmark lending rates, the institution attended, loan amount and borrower’s economic profile.

The terms of the State Bank loans are far more consumer friendly than on those made by private lenders, including interest rates which are two or more percent lower. The bank also offers preferential terms, on interest rate and collateral, for students admitted to the top-ranked global institutions. Other government-run banks broadly follow the same rules as the State Bank.

Credila is India’s largest specialized education lender. It offers loans exceeding Rs 5 million, $53,000. In its assessment, it places more emphasis on figuring out if a borrower and their family can repay the loan. So, Credila examines a student’s academic profile, ranking of the foreign university which they plan to attend, future income potential, and, perhaps most important, the financial resources of parents and other co-signers of a loan.

Education loans account for only about two per cent of total outstanding personal loans in India. While a small portion of overall consumer borrowing, they have risen sharply, up from less than a quarter percent in the early 2000s.

However, education loans have emerged as one with the highest level of loan defaults among all consumer loans. In 2024, nearly four percent of the total education loans outstanding were non-performing, with payments not being made for ninety days or more, according to the Reserve Bank of India. A stricter economic-loss ratio measure, including restrucutred loans, would show a far higher rate of loan defaults. Many loans are restructured since many graduates earn significantly less than estimated at the time the loans were disbursed.

Even as defaults rise on education loans, there is little evidence of lenders taking possession of homes and other collateral. Typically, lenders are reluctant to pursue foreclosure of homes and other assets since it impacts middle class families, who are politically vocal. Apparently, ruling politicians fear that aggressive recovery tactics by lenders will bring more attention to the major issue of high unemployment in India, including among STEM graduates, which drives students to pursue a foreign degree.

So, while financial institutions have the legal authority to seize a home used as collateral, they do so rarely. They pursue alternative measures such as restructuring, repayment rescheduling, settlements and recovery proceedings. This may explain why Credila pays less emphasis to securing collateral when making education loans.

However, at a macro level, even a substantial deterioration in the performance of educational loan portfolios is unlikely to de-stabilize India’s banks. This is because of the modest size of educational loans compared with housing and credit card loans, and more so, compared to the government-run banks massive lending to businesses and farmers.

Each year though, hundreds of thousands of middle-class families join the ranks of those facing financial stress due to taking on a foreign education loan. For many of them, the loans may exceed the mortgage debt they owe on their homes. Loan repayments reduce consumption, deplete retirement savings, and, in some cases, require additional borrowing.

In recent weeks, several hundred thousand students returned to India, since they could not find jobs in the US, UK, and other foreign countries. Indians are hearing grim stories from relatives, neighbors and friends about them being burdened with large foreign education debt. Such stories are also being covered by Indian news sites and on social media posts.

By now, the Reserve Bank of India should have data which can identify foreign programs and institutions which offer the best chance for an Indian student to secure a foreign job, or, if forced to return, enable them to find a high-paying job in India. The RBI should mandate that lenders only make loans to students enrolling in such programs.

Ultimately, the responsibility lies on the parents and the students. They should view borrowing for a foreign degree with a realistic understanding of the risks.

A foreign education loan should not be a speculative gamble, like borrowing a large, high interest loan to buy a lottery ticket.

Sunil Mani is a visiting professor, Centre for Development Studies, and Ahmedabad University, both in India. The views expressed are personal.