AN EVALUATION OF THE IMPACT OF FEDERAL STUDENT LOAN DEFAULT RATES AND THEIR CONSEQUENCES FOR THE NIGERIAN ECONOMY

CHAPTER ONE INTRODUCTION 1.1 Background of the Study In recent decades, Nigeria’s higher education sector has experienced remarkable growth, with more students enrolling in universities than ever before. To support this expanding student population, the Nigerian government has introduced student loan schemes through various financial institutions. These programs aim to assist students from economically disadvantaged backgrounds by covering tuition fees, accommodation, and other educational expenses, thereby broadening access to higher education (Adamu, 2018). While these loan schemes are designed with good intentions, the issue of loan default remains a serious challenge. A loan is considered to be in default when the borrower fails to make repayments within a designated period, typically 270 days for federal student loans. High default rates carry serious consequences for borrowers, such as damage to their credit ratings, reduced chances of obtaining future loans, and possible legal action. The widespread problem of federal student loan defaults has significant economic implications for Nigeria. Since higher education plays a crucial role in individual empowerment and national development, ensuring that education remains affordable and accessible through loans is critical. However, difficulties in loan repayment and escalating default rates can adversely affect the economy, impacting borrowers as well as financial institutions and the educational system at large. Several factors contribute to the high default rates on student loans in Nigeria. The country faces high unemployment and underemployment levels, especially among fresh graduates, making it challenging for many borrowers to meet their repayment obligations due to unstable or insufficient incomes (Okojie, 2019). Economic factors like inflation and economic instability also affect borrowers’ repayment capacity; downturns often lead to layoffs and reduced earnings, further worsening default rates (Eze, 2021). Additionally, many students lack adequate financial literacy, which results in poor understanding of loan terms, interest rates, and long-term borrowing consequences. This gap often leads to poor financial decisions and missed repayments (Oluwatobi, 2020). The high incidence of federal student loan defaults imposes substantial burdens on the Nigerian economy. The government often has to absorb the costs of unpaid loans, diverting funds away from critical sectors such as healthcare, infrastructure, and basic education (Nkoro & Uko, 2016). Financial institutions that manage student loans also face increased risks and potential losses, which could lead to tighter lending policies and decreased loan availability for future students (Okafor, 2018). Since education is a key driver of economic growth and development, the prevalence of loan defaults threatens the success of these programs, limiting educational access and slowing the development of vital human capital (Bello & Suleiman, 2017). Moreover, widespread defaults can negatively affect the credit market by increasing the perceived risk of lending to students, which may lead to higher interest rates and reduced credit access across other sectors (Olowookere, 2019). In light of these challenges, this study seeks to examine the effects of federal student loan default rates and their broader implications for Nigeria’s economy. 1.2 Statement of the Problem Loan default occurs when borrowers fail to meet repayment obligations within the agreed timeframe (Adebayo, 2021). In Nigeria, the rising incidence of federal student loan defaults presents significant financial challenges that require urgent attention. Student loans are intended to help individuals access higher education, thereby cultivating a skilled workforce essential for national development. However, the increasing default rates undermine this goal and pose risks not only to the borrowers but to the economy as a whole. When borrowers default, the government faces added fiscal pressure, needing to allocate more funds to manage and offset the fallout of unpaid loans. This diversion of resources may detract from other vital development areas such as healthcare, infrastructure, and primary education (Adebayo, 2021). Additionally, high default rates may cause financial institutions to tighten lending criteria, reducing future loan accessibility and limiting educational opportunities for prospective students (Oladeji, 2022). Consequently, this study aims to evaluate the effects of federal student loan default rates and their economic implications for Nigeria. 1.3 Objectives of the Study The main objective of this research is to evaluate the impact of federal student loan default rates and their implications for the Nigerian economy. The specific objectives are: i. To identify the factors leading to federal student loan defaults among Nigerian graduates. ii. To assess the magnitude of federal student loan defaults among Nigerian graduates. iii. To examine the effects of federal student loan defaults on the Nigerian economy. 1.4 Research Questions To guide this study, the following research questions have been formulated: i. What factors contribute to federal student loan defaults among Nigerian graduates? ii. What is the extent of federal student loan defaults among Nigerian graduates? iii. How do federal student loan defaults affect the Nigerian economy? 1.5 Significance of the Study This study holds importance for policymakers by highlighting the key causes of loan defaults among federal student loan beneficiaries, such as employment issues and lack of financial literacy. Insights from this research can inform targeted policy interventions. Moreover, the study contributes to academic knowledge by enriching existing literature and providing a resource for future research in this area. 1.6 Scope of the Study This research focuses on analyzing the effects of federal student loan default rates and their economic implications for Nigeria. Specifically, it investigates the causes of federal student loan defaults among Nigerian graduates, evaluates the extent of these defaults, and assesses their impact on the economy. Geographically, the study is limited to Ahmadu Bello University. 1.7 Limitations of the Study Like any research, this study faced some challenges: Time constraints: The researcher had to balance this project with other academic responsibilities, such as attending lectures and fulfilling course requirements. Financial constraints: Conducting the research involved expenses related to printing, sourcing materials, and data collection. Availability of materials: Accessing relevant literature proved difficult due to limited resources on the subject, which posed a limitation for the study. 1.8 Definition of Terms Federal Student Loan: A loan provided by the federal government to assist students with the costs of post-secondary education. These loans typically offer lower interest rates and more flexible repayment options compared to private loans. Default Rate: The percentage of borrowers who fail to repay their loans as agreed. A high default rate signals that many borrowers are unable to meet repayment obligations. Economic Stability: A condition where the economy experiences steady growth, low inflation, low unemployment, and balanced supply and demand. GDP (Gross Domestic Product): The total value of goods and services produced within a country during a specific period, usually a year; it reflects overall economic activity. Non-performing Loans: Loans on which borrowers are not making interest or principal payments, considered either in default or close to it. Financial Literacy: The knowledge and skills to manage personal finances effectively, including budgeting, investing, and understanding financial products. Labor Market: The relationship between the supply of workers and available jobs, which influences employment rates and wages.