Parliament revives plan to lighten student loan debt load

There is a new ray of hope for Kenyan university students following a fresh attempt by parliament to cut loan interest rates and extend the repayment period. New legislation under consideration could lower the interest rate on the Higher Education Loans Board (HELB) loans by one percentage point to 3%.

The proposed HELB (Amendment) Bill of 2023 will also give a reprieve to graduates as they will be required to start repaying the loans only after securing jobs. The current policy requires repayments to start a year after graduating, regardless of employment status. Those who fail to repay are slapped with penalties of US$500 for each month defaulted and, eventually, the graduates are listed with credit reference bureaus.

The bill follows a decision by former president Uhuru Kenyatta in mid-2022 to reject a similar proposal that had been passed by parliament. He argued that cutting the loan rates would significantly deplete the HELB fund, making it unable to meet the growing loan needs caused by the increasing number of student admissions.

Helping students the priority

But proponents of the bill now argue that it is a priority to cushion jobless youths from punitive repayment demands and high interest rates in the face of a tough economic environment in which more than 70% of graduates are not able to secure jobs in the country.

Should the bill – sponsored by Machakos County Women’s Representative Joyce Kamene – become law, HELB will be barred from charging interest on the loans unless a graduate has secured a job, or before five years have elapsed since the graduate left university, whichever comes first.

In his memorandum to parliament explaining the reasons for rejecting the bill, Kenyatta said he was against the blanket exemption of graduates from repaying loans. The former president argued that beneficiaries of HELB who are self-employed would not declare they are generating an income in a bid to delay loan repayments.

“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 25 June 2022.

Revolving fund suggested

The developments put Kenya’s President William Ruto in the spotlight as he was elected in August 2022 on the promise of cushioning the youth against economic pressures. He would, therefore, be expected to support the proposed changes to the law to shield thousands of students who depend on the HELB loans to secure a university education.

HELB is opposed to the move to cut the rates. Its chairman, Ekwee Ethuro, said at the HELB Universities Consultative Forum on 27 April 2023: “The HELB Act continues to face legislative onslaught that weakens its capacity to recover loans from past loanees. The onslaught ranges from capping interest rates, prolonging the commencement of charging interest rates, and grace period for [repayment of] the loans. We request that the ministry of education continues to engage parliament for them to understand HELB’s intention and approach in strengthening the mechanism for establishing a revolving fund for the benefit of our future generations.

“The reduction of interest rates is likely to plunge the HELB into a huge student funding deficit where over 18,730 needy students may miss out on funding annually.”

In fact, HELB has been planning to review interest on loans to match it to the Central Bank of Kenya’s base rate, currently at 9.5%. This proposal has, however, been opposed by stakeholders across the country, saying it would not be tenable to price student loans at commercial rates. This would make the loans more expensive for students, placing a bigger repayment burden on them after graduation and exposing HELB to higher credit risk.

Interest rates blamed for loan defaults

“Student loans are generally meant for the needy students and, therefore, pricing them as per the market rates would mean you are locking out those who need this support most. We are opposed to the proposal to price loans based on commercial rates,” said Dennis Owuor Ochieng, a student leader at Moi University.

Ethuro quotes the latest HELB data that show that loan accounts in default currently stand at 125,609, an amount of US$117 million.

Legislators blamed repayment demands and existing interest rates for the high default rates. 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 the inability of the agency to attract new funding. This deficit left more than 75,000 first-year students, the majority from poor backgrounds, without access to loans.

Many defaulters untraceable

HELB is now seeking avenues to boost its cash flows to meet the growing demand. Last year, it announced that it is seeking a US$100 million syndicated loan from an international financier. The agency said it was in discussions with the Kenyan National Treasury to secure the debt at a rate of 7% for onward lending to university students.

Additionally, the agency plans to float an education bond after seeking clearance from the Capital Markets Authority of Kenya and the Kenyan National Treasury.

HELB is mandated to provide loans, bursaries, and scholarships to Kenyan students pursuing higher education in recognised higher education institutions and to recover loans from the beneficiaries. It is estimated that HELB is owed almost US$500 million by former university students and cannot trace 17,000 of its loan defaulters.