AN ASSESSMENT INTO THE EFFECT OF FEDERAL STUDENT LOAN DEFAULT RATES: IMPLICATION FOR THE NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

Background of the study

The higher education system in Nigeria has seen significant growth in recent decades, with a rising enrollment of students pursuing university education. In order to facilitate this expansion, the Nigerian government has implemented student loan initiatives via several financial institutions. As argued by Ihsiab (2019),these programmes are designed to provide financial aid to students from low-income households. The purpose of these loans is to provide financial support for tuition fees, lodging, and other associated costs, with the aim of increasing access to education for a wider portion of the population. According to Adamu, (2018) student loan programmes are well-intentioned, hence he defined loan default as when the borrower neglects to fulfil the agreed-upon payment obligations within a set timeframe, usually 270 days in the case of federal student loans. Borrowers that have high default rates may face significant repercussions, such as negative impacts on their credit ratings, limited opportunities to get loans in the future, and even legal implications. 

Given the growing importance of higher education for individual and societal progress, ensuring that education is accessible and affordable via student loans is of utmost importance. According to Umeze & Joshua (2021), the issue of federal student loan default rates have substantial ramifications for any economy, particularly Nigeria. The difficulty of repaying loans and the resulting high rates of default may have significant impacts on the economy, affecting not only individual borrowers but also the wider financial and educational institutions. Multiple reasons contribute to the elevated rates of default on student loans in Nigeria.  The Nigerian labour market has elevated levels of unemployment and underemployment, particularly among recent graduates. Many borrowers struggle to fulfil their repayment commitments due to the absence of reliable revenue streams (Okojie, 2019).  

In the words of Eze (2021), macroeconomic variables such as economic volatility and inflation have the potential to impact borrowers' capacity to repay their loans. During periods of economic decline, there is a tendency for job cuts and decreased income, which worsens the issue of loan defaults. A significant number of students have insufficient financial literacy, leading to a limited comprehension of loan conditions, interest rates, and the lasting consequences of borrowing. This often results in unfavorable financial choices and subsequent failures to meet financial obligations (Oluwatobi, 2020).  Nevertheless, the significant rates of nonpayment on federal student loans have extensive consequences for the Nigerian economy, as they amplify the financial strain on the government, which would have to assume the responsibility of covering the expenses of unpaid loans. This allocation of cash detracts resources from other essential sectors such as healthcare, infrastructure, and education (Nkoro & Uko, 2016).  Financial organisations engaged in the distribution and administration of student loans are confronted with heightened risks and the possibility of incurring losses as a result of elevated rates of loan defaults. This may result in more stringent lending standards and less accessibility of loans for prospective students (Okafor, 2018).  Therefore, the researcher sought to assess  the effect of federal student loan default rates: implication for the Nigerian Economy.

Statement of the problem

In recent times, the growing frequency of federal student loan defaults in Nigeria poses substantial fiscal difficulties and need immediate intervention. Student loans serve the purpose of offering financial assistance for pursuing higher education, which in turn contributes to the formation of a knowledgeable workforce that is crucial for the progress of a country. Nevertheless, the increasing rates of default weaken this objective, presenting hazards not just to the borrowers but also to the wider economy. 

In the view of Usman & Halima (2022) student loan programs may be rendered less successful by high default rates, which in turn restrict access to education and impede the development of human capital necessary for sustained economic growth Consequently, this may result in elevated interest rates and diminished availability of credit for other segments of the economy Olowookere, (2019) assert that first and foremost, when borrowers fail to repay their loans, it puts a greater financial strain on the government. As a result, the government must spend more resources to handle and lessen the consequences of these loan defaults. This reallocation of cash might divert resources from other crucial sectors of national development, like as healthcare, infrastructure, and elementary education. Similalrly in his study, Adebayo (2021) highlighted that elevated rates of default might result in a decrease in the accessibility of future loans, as financial institutions adopt a more cautious approach, hence restricting the opportunity for prospective students to pursue higher education.

Whereas existing studies has pointed that the perceived risk associated to default of student loan, there is paucity of recent study on student loan with specific reference reference to that of president Tinubu led administration. Hence, the study assesses the effect of federal student loan default rates: implication for the Nigerian Economy. 

1.3 Objective of the study

The broad objective of the study is to assess  the effect of federal student loan default rates: implication for the Nigerian Economy. The specific objectives is as follows

Investigate the factors contributing to federal student loan defaults among Nigerian graduates.

Evaluate the extent of the federal students  loan default among Nigerian graduates.

Assess the effect of federal student loan default on the Nigerian economy

1.4 Research questions

The following questions have been prepared to further guide the study

What are the factors contributing to federal student loan defaults among Nigerian graduates?

What is the extent of the federal students loan default among Nigerian graduates?

What is the effect of federal student loan default on the Nigerian economy?

1.5 Significance of the study

The study will be significant to policymakers as it will reveal the key factors contributing to loan defaults among beneficiary of the federal student’s loan, such as employment challenges and financial literacy, the study will help in formulating targeted interventions by policy makers to ensure student repay their loan as at when due. Practically, the study will open the eyes of student to the many funding opportunities from government in other to facilitate their education and make reasonable steps to access them. 

Furthermore, the study will be significant to the academic community as it will contribute to the existing literature, add to library resources and serve as a guide for future researchers.

1.6 Scope of the study

The study focus on the effect of federal student loan default rates: implication for the Nigerian Economy. Empirically, the study will investigate the factors contributing to federal student loan defaults among Nigerian graduates, evaluate the extent of the federal students loan default among Nigerian graduates and assess the effect of federal student loan default on the Nigerian economy.

Geographically, the study is delimited to Ahmadu Bello University.

1.7 Limitation of the study

Like in every human endeavor, the researchers encountered slight constraints while carrying out the study. 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. The study is limited by its diminutive sample size and restricted geographical range, concentrating just on Ahmadu Bello University. Hence, the findings of this study cannot be extrapolated, thereby necessitating additional research. 

Furthermore, the researcher's restraints were predominantly attributable to financial limitations, as they are a student without a means of revenue to support themselves. The research location's high transportation costs, impacted by current inflation in Nigeria, made it difficult to afford transportation fees. In addition, the researcher encountered a time limitation as a result of the necessity to do this research while simultaneously meeting the responsibilities of attending lectures and engaging in other educational pursuits.

1.8 Definition of terms

Federal Student Loan: A loan provided by the federal government to help students pay for their post-secondary education. These loans often have lower interest rates and more flexible repayment terms compared to private loans.

Default Rate: The percentage of borrowers who fail to repay their loans according to the agreed terms. A high default rate indicates that many borrowers are struggling to meet their repayment obligations.

Economic Stability: A state in which an economy experiences constant growth and low inflation, resulting in low unemployment and a balance between supply and demand.

GDP (Gross Domestic Product): The total value of all goods and services produced within a country over a specific period, usually a year. It is a broad measure of a nation’s overall economic activity.

Non-performing Loans: Loans on which the borrower is not making interest payments or repaying any principal. These loans are considered to be in default or close to default.

Financial Literacy: The ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing.

Labor Market: The supply of available workers in relation to available work. The labor market conditions significantly influence employment rates and wage levels.