President rejects bill aimed at cheaper student loans

Kenya university students have suffered a big blow after President Uhuru Kenyatta postponed consideration of a bill that would have made student loans cheaper and extended the repayment period.

The president sent back the Higher Education Loans Board (HELB) Amendment Bill 2020 for reconsideration by parliament, at a time when the National Assembly is on recess ahead of the August general elections.

This means students will have to wait until after the elections when the National Assembly resumes its work, before it will look at the President’s recommendations on the bill which, among other things,
seeks to increase the grace period for the repayment of loans to five years.

Had the proposed legislation seen the light of day, HELB, the agency that disburses loans to students on behalf of the government, would have been stopped from charging interest on the loans unless a graduate has secured a job, or five years had lapsed since the graduate left university, whichever came first.

Currently, beneficiaries of the government-backed HELB loans are required to start repaying a year after clearing campus, irrespective of whether or not they have secured employment.

This requirement has been blamed on the current high default rates as 70% of the new graduates find it hard to secure jobs after graduation, often taking three years or more.

When they don't pay, the students are slapped with hefty penalties, currently set at US$50 for every month defaulted. They are then also listed as defaulters at credit reference bureaus.

Reduction in interest charged

The bill, which was seeking to amend the Higher Education Loans Board Act, also wants to waive the imposition of interest on the principal amount of a loan advanced to the youth and persons with a disability until such time as they have secured their first employment.

In one of the most transformative changes, the proposed law also seeks to reduce the interest charged on student loans from the current four to three percent.

This would make it more affordable for poor students to seek and access the loans at charges way lower than the market commercial lending rates which average 12% in Kenya.

The bill, which had been tabled in Parliament via a private members’ motion, had been touted as a game-changer as it would have introduced a huge relief for recent graduates and future students who, in most cases, struggle to repay the loans even after securing jobs due to pressing economic pressures among the youth in Kenya.

While presenting the bill in Parliament, Gideon Keter, the MP who sponsored it, reckoned that it was taking an average of six years for fresh graduates to secure gainful employment and even then, the interest chargeable was prohibitive.

Is the bill sound?

In his memorandum to parliament explaining his reasons for rejecting the bill, Kenyatta said he was against the blanket exemption of graduates from repaying loans.

The president argued that beneficiaries of HELB who are self-employed would not declare they are in income-generating activities in a bid to delay loan repayment.

“This provision will adversely affect the sustainability of HELB as a revolving fund. Delaying the date of commencement of repayment of student loans will consequently reduce the amount recovered by HELB,” said Kenyatta in his paper to parliament on June 25.

The agency is currently battling a fresh financial crisis following a sharp rise in defaults due to layoffs, salary cuts and a freeze in hiring set off by COVID-19. HELB’s latest data show that at least
109,661 former university students have defaulted on payments, holding up to US$109 million as at the end of 2021. The figure stood at US$67 million two years ago.

Independent observers backed the president's view, saying the Bill was not sound from a business viability perspective.

“Though the soundness of the proposal is not in question as it sought to save millions of unemployed graduates from monthly fines, it would have hit hard at HELB funding pool and in return hurt its financial stability.

“HELB is supposed to be a revolving fund in which beneficiaries who have completed studies pay back the loans to support a fresh group of students. This has, however, not been the case in an economic setting that is plagued by a hiring freeze on the back of sluggish corporate earnings,” said the Business Daily, a Kenyan newspaper, in an editorial also rejecting the bill.

“Since the majority of loan applicants come from poor households and require financial support from HELB to pay for their tuition and upkeep, any changes to the law mustn't kill the institution. This would deny future generations access to tertiary education.

“It is possible to shield jobless university graduates from penalties and at the same time find those earning some income, even as self-employed, to repay their loans,” the editorial argued.

The loan defaults have nearly crippled HELB’s lending capacity at a time when there are more students seeking loans than ever before.

The rise in non-performing loans has left the agency battling a huge deficit, made worse by falling government subsidies and inability of the agency to attract new funding.

This deficit left more than 75,000 first-year students, the majority coming from very poor backgrounds, without access to the loans.

The students who joined in September 2021 had to wait until March this year when the National Treasury remitted some US$300 million for initial disbursement.