Tinubu’s student loan plan is great. But there is a better way to do it.

The Federal Government of Nigeria recently signed the Student Loans (Access to Higher Education Act, 2023 into law. This is a big step in the right direction of providing affordable credit for all Nigerians. Nigeria can’t grow without credit – that’s a fact. 

Only a little over 1% of Nigerians are successfully enrolled in a higher education institution and we can’t pretend not to know that the major barrier to accessing higher education for the majority of Nigerians is simply that they can’t afford it. What the Government has done now is to provide a solution to significantly lower that barrier for indigent Nigerians and empower their future through education, to be more productive members of the society. What’s more? These student loans are interest-free; at least for now. 

This is definitely commendable. 

However, with the way the student loan scheme is currently set up, it might just be destined for disaster. The strict criteria and paperwork required are quite unrealistic for the less privileged students these loans are targeted at. For instance, to qualify for the loan, applicants need to prove that their household income is less than N500,000 per annum or N47,000 per month. This means bank statements and maybe even tax clearance certificates. Needless to say, this poses a problem for low income households who mostly work low paying blue collar jobs or engage in petty trading and remain outside the formal financial sector.

In addition to this, applicants are required to provide at least two guarantors from a limited list of: a level 12 civil servant, a lawyer with 10 years post-call experience, a judicial officer or a justice of peace. The chances that the poor families run in the same circles with these people are slim to none. Even if these requirements are somehow met, there’s no certainty that the loans will be granted as they are subject to the availability of Government funds. These are some of the concerns with the current student loan plan.

This way will fail. Miserably.

Why is it important to ensure the student loan scheme works?

Student loans will secure the future of Nigeria with talent and allow the economy to grow at a sustainable pace. The impact would be felt within a maximum of four years with the fresh graduates’ entrance into the labor market. The labor market will be set to receive an inflow of better qualified job seekers. There might not be enough jobs right now but there’s equally a shortage of talent in the labor market.

Naturally, a reduction in crime will be expected to follow. Educated students are more likely to get jobs and create value than risk their lives or freedom for crime. Even the rent-seeking activities and the entitlement it breeds amongst our young people will see a decline.

With better education and an accompanying improvement in the standard of living, Nigeria will see a rise in our currently poor human development index (HDI) score.

An uneducated Nigeria in 10 years will be a disaster of epic global level.

Is there a better way this could be done?

This is too good an opportunity to pass up or botch. Here are a few ideas that could be implemented to improve the way the student loans will run:

There should be a student loan financing scheme which students, regardless of their parents’ income, can access as long as they meet the schools’ admission requirements. This way, there is much more focus on the ability and merit of the students rather than their parents’ circumstances. This also means it shouldn’t be limited to the poorest students alone. 

This financing can be processed through the universities. The universities, upon acceptance of a qualified candidate, can apply for financing on their behalf. Of course, the universities must also meet a certain standard that assures financiers that the student will receive a quality education that increases their chances for success upon graduation. In view of this, the financing may be restricted to certain courses for which job opportunities are readily available. This helps to manage the risks associated with repayment down the line.

Additionally, transferring the responsibility of financing the loans to the existing private banks takes care of the “disbursement is subject to the availability of funds” clause. Public-private sector partnership can go a long way in ensuring the success of this initiative.

Involving the banks means students may also have the option of securing their admission first and processing the financing through the banks. The only role the Government might play in this is to back the loans; to guarantee the loans in a sense, so the banks can lend confidently.

Essentially, what this is what this could look like: Student Lagbaja gets admitted into ABC university and informs the university he would like to finance his studies via a student loan. He fills out an application for the student loan at the university and the university submits this request to a bank they would have partnered with for this purpose. The university assures the financier that the student is enrolled in an accredited program for a specific duration and they will receive quality academic instruction. Student Lagbaja’s fees are covered by the bank and that’s it. He can go into the world and succeed. And of course, start repaying the loan when due.

What are the benefits of implementing the student loan plan this way?

Let’s get straight into it: 

The first benefit is that this way, the loans can be allocated with merit at the heart of the requirements. Enforcing a minimum standard of academic excellence to access the student loans also ensures that only the students with the best future prospects benefit.

The need for guarantors becomes irrelevant  and this removes the classist implications of the current requirements of such out -of-reach high-ranking officials as guarantors.

Another benefit of this approach is that students can take responsibility for this process without involving their parents, who may be unable to help because they don’t have the resources or an understanding of what’s required of them.

Finally, a more efficient loan distribution network can be established through the banks. This removes the possibility of the process being held back by Government inefficiency, bureaucratic red tape and corruption.

What’s the assurance that this approach would work better?

It’s quite simple really. Banks are more effective with lending and loan recovery. We can’t forget that the Government already tried student loans in the 1970s and had to abandon the efforts when they couldn’t hold people accountable when it came to repayment.

Universities would also be forced to improve their offerings and facilities to be able to onboard more students who can attend on loan.

The final question to answer after considering all these is perhaps the question of how the Government will ensure the loans are cheap? Interest-free loans start and end with the Government. Incentives such as tax write backs would work quite well here to make lending attractive to the financiers and keep the loans at maybe even single digit interest rates.

I’ll give the current student loan plan an A for effort, but the follow-through is in danger if they decide to go ahead without making adjustments. At a time like this, let’s hope the Government hears the people and acts accordingly.

Author: dejiolowe

Adédèjì is the founder of Lendsqr, the loan infrastructure fintech powering lenders at scale. Before this, he led Trium Limited, the corporate VC of the Coronation Group, which invested in Woven Finance, Sparkle Bank, Clane, and L1ght, amongst others. He has almost two decades of banking experience, including stints as the Divisional Head of Electronic Banking at Fidelity Bank Plc. He drove the turnaround of the bank’s digital business. He was previously responsible for United Bank for Africa Group’s payment card business across 19 countries. Alongside other industry veterans, he founded Open Banking Nigeria, the nonprofit driving the development and adoption of a common API standard for the Nigerian financial industry. Beyond open APIs, Adédèjì works deeply within the fintech ecosystem; he’s the board chairman at Paystack. Adédèjì is a renowned fintech pundit and has been blogging on technology and payments at dejiolowe.com since 2001.

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