THE IMPACT OF FEDERAL STUDENT LOAN INTEREST RATES ON BORROWER REPAYMENT BEHAVIOR IN NIGERIA

CHAPTER ONE

INTRODUCTION

Background of the study

Student loans have become a crucial element of worldwide higher education finance. In the last ten years, college students have accumulated higher levels of debt in order to fund their higher education.  The rise in student borrowing has been followed by higher rates of delinquency and default. According to a study by Looney and Yannelis in (2019), about 30% of borrowers in recent groups failed to return their debts after 5 years of starting the repayment process. Student loans continue to be essential for many students in funding their education. On average, the financial benefits gained from attending college, in terms of lifetime wages, will much surpass the borrowing costs (Avery and Turner, 2012). Even borrowers who will ultimately see a favourable return on their investment in higher education may have difficulties in repaying their debts.  

In Nigeria, the government student loan plan was implemented in Nigeria with the aim of reducing the financial strain on students and their families, hence improving the availability of higher education. Nevertheless, the influence of interest rates on these loans has been a topic of considerable controversy. The student loan programme in Nigeria was established to provide assistance to students who were unable to pay the increasing expenses associated with higher education. The administration of the system is carried out by many government departments and financial organisations, with interest rates being subject to fluctuations depending on economic circumstances and government policy. 

Traditionally, inflation, fiscal policy, and the government's larger economic aims have had an impact on interest rates (Ezeani, 2018).  The socioeconomic status of borrowers significantly influences their capacity to repay loans. Students from economically disadvantaged backgrounds often encounter substantial financial obstacles, which may be intensified by exorbitant interest rates on loans (Olaniyan & Okemakinde, 2018). Moreover, the quality of education and the resulting job prospects accessible to graduates might impact their ability to repay loans (Onuka & Onuka, 2022). Moreover, the regulatory structure that governs federal student loans in Nigeria has undergone changes and developments throughout the years. Government measures designed to enhance school accessibility sometimes include subsidising interest rates or providing flexible repayment schemes (Akinyemi & Bassey, 2022). Nevertheless, the presence of policy inconsistencies and economic uncertainty has the potential to weaken these efforts, hence impacting the repayment behavior of borrowers (Adepoju & Akinola, 2021).  Prior research has examined many facets of student loan repayment, such as default rates, repayment schemes, and the economic consequences of student debt. Nevertheless, there is a scarcity of research that particularly investigates the influence of interest rates on repayment behavior in Nigeria. Therefore, the researcher sought to evaluate the impact of federal student loan interest rates on borrower repayment behavior in Nigeria.

Statement of the problem

In recent times, the escalating prices associated with pursuing higher education in Nigeria have compelled the introduction of federal student loan initiatives to assist students who are unable to meet the financial demands of tuition fees and other related costs. Although these loans are accessible, the rates at which they are repaid continue to be a serious problem. 

Choy (2020) in his study averred that the interest rate imposed to these loans is a crucial determinant of repayment behavior. Obasa (2019) emphasized that high-interest rates may worsen the financial strain on borrowers, resulting in higher rates of default and financial hardship. On the other hand, reducing interest rates may help reduce the burden of repaying loans, but it can also create difficulties for the long-term viability of the lending programmes.  However, the relationship between federal student loan interest rates and repayment behavior in Nigeria is not fully understood. Prior research has mostly examined the broad economic variables that influence the ability to repay loans (Obasi, 2020), as well as the socioeconomic characteristics of borrowers (Olaniyan & Okemakinde, 2018). Nevertheless, there is a dearth of extensive studies particularly investigating the impact of interest rates on repayment habits. Hence, the study evaluates the impact of federal student loan interest rates on borrower repayment behavior in Nigeria.

1.3 Objective of the study

The broad objective of the study is to evaluate impact of federal student loan interest rates on borrower repayment behavior in Nigeria. The specific objectives is as follows

To identify the factors influencing student loan repayment behavior in Nigeria.

To determine the extent of  default rates of federal student loan among borrowers in Nigeria.

To assess the impact of varying interest rates on the repayment behavior of borrowers of the federal student loan in Nigeria.

To investigate the repayment behavior of federal student loan borrowers in Nigeria

1.4 Research questions

The following questions have been prepared to further guide the study

What are the factors influencing student loan repayment behavior in Nigeria?

What is the extent of  default rates of federal student loan among borrowers in Nigeria?

What is the impact of varying interest rates on the repayment behavior of borrowers of the federal student loan in Nigeria?

What is the repayment behavior of federal student loan borrowers in Nigeria?

1.5 Significance of the study

The study will be significant to the ministry of education as it findings can help ensure that interest rate policies do not inadvertently create barriers to education for low-income students. The study will also be significant to policymakers as it will reveal the relationship between interest rates and repayment behavior, thereby informing them to develop strategies that balance the need to fund higher education sustainably with the goal of reducing default rates and financial stress on borrowers. Furthermore, the study will be significant to the academic community as it will contribute to existing literature and serve as a guide to future researchers.

1.6 Scope of the study

The study focus on the impact of federal student loan interest rates on borrower repayment behavior in Nigeria. Empirically, the study will  identify the factors influencing student loan repayment behavior in Nigeria, determine the extent of  default rates of federal student loan borrowers in Nigeria, assess the impact of varying interest rates on the repayment behavior of borrowers of the federal student loan in Nigeria and investigate the repayment behavior of federal student loan borrowers in Nigeria.

Geographically, the study is delimited to Obafemi Awolowo University, Ile- Ife, Osun State.

1.7 Limitation of the study

Like in every human endeavour, the researchers encountered slight constraints while carrying out the study. The significant constraints are: 

Time: The researcher encountered time constraint as the researcher had to carry out this research alongside other academic activities such as attending lectures and other educational activities required of her.

Finance: The researcher incurred more financial expenses in carrying out this study such as typesetting, printing, sourcing for relevant materials, literature, or information and in the data collection process.

Availability of Materials: The researcher encountered challenges in sourcing for literature in this study. The scarcity of literature on the subject due to the nature of the discourse was a limitation to this study.

1.8 Definition of terms

Federal Student Loans:  Financial aid provided by the government to help students pay for their education. 

Interest Rates:   The percentage of a loan amount charged by the lender to the borrower for the use of the money, typically expressed as an annual percentage of the loan outstanding.

Repayment Behavior: The manner in which borrowers manage and fulfill their loan repayment obligations, including the frequency, timing, and completeness of payments.

Default Rate: The percentage of borrowers who fail to repay their loans according to the terms agreed upon, often leading to financial penalties and credit score implications.

Socioeconomic Factors:  The social and economic characteristics of individuals, including income, education level, employment status, and family background, which influence their financial behaviors and decisions.