AN INVESTIGATION INTO HOW FEDERAL STUDENT LOAN INTEREST RATES INFLUENCE BORROWERS’ REPAYMENT BEHAVIOR IN NIGERIA

CAPTER ONE INTRODUCTION 1.1 Background of the Study Over the past decade, there has been a notable increase in the amount of debt college students have taken on to finance their higher education. This rise in student borrowing has been accompanied by growing rates of loan delinquency and default. According to research by Looney and Yannelis (2015), roughly 30% of borrowers from recent cohorts had not repaid their student loans five years after beginning repayment. Despite this, student loans remain a vital source of funding for many students pursuing higher education. On average, the financial returns from obtaining a college degree, particularly in terms of lifetime earnings, outweigh the costs of borrowing (Avery & Turner, 2012). However, even borrowers who ultimately benefit from their investment in education may struggle to manage repayment. Student loans have become an essential component of financing higher education worldwide. In Nigeria, the government introduced a student loan scheme aimed at reducing the financial burden on students and their families to make higher education more accessible. Nevertheless, the interest rates applied to these loans have sparked considerable debate. The Nigerian student loan program was created to support students who cannot afford the rising costs of university education. The administration of this scheme involves several government agencies and financial institutions, with interest rates fluctuating based on economic conditions and government policies. Factors such as inflation, fiscal policies, and broader government economic objectives traditionally influence these interest rates (Ezeani, 2014). Furthermore, the socioeconomic background of borrowers plays a significant role in their ability to repay loans. Students from low-income families often face greater financial challenges, which are exacerbated when high interest rates are applied to their loans (Olaniyan & Okemakinde, 2008). Additionally, the quality of education received and the employment opportunities available to graduates also affect their repayment capacity (Onuka & Onuka, 2012). Over time, the regulatory framework governing federal student loans in Nigeria has evolved. The government has implemented policies such as subsidizing interest rates or offering flexible repayment plans to increase access to education (Akinyemi & Bassey, 2012). However, inconsistencies in policy and economic uncertainties can undermine these efforts and influence borrowers’ repayment behaviors (Adepoju & Akinola, 2021). While existing research has explored various aspects of student loan repayment—such as default rates, repayment plans, and the broader economic impacts of student debt (Barr, 2004; Johnstone, 2005)—there remains a lack of focused studies examining how interest rates specifically affect repayment behavior in Nigeria. This study therefore aims to investigate the influence of federal student loan interest rates on the repayment habits of Nigerian borrowers. 1.2 Statement of the Problem The rising cost of higher education in Nigeria has necessitated the introduction of federal student loan programs to assist students who cannot cover tuition and other expenses. Despite the availability of these loans, repayment rates remain problematic. Interest rates attached to these loans are a critical factor influencing repayment behavior. High interest rates can increase financial pressure on borrowers, leading to higher default rates and financial distress (Dynarski, 1994; Choy, 2000). Conversely, lowering interest rates may alleviate repayment burdens but could threaten the long-term sustainability of loan programs (Barr, 2004). The specific relationship between federal student loan interest rates and repayment behavior in Nigeria has not been fully explored. Prior research has largely focused on broader economic influences on repayment ability (Obasi, 2020) and borrowers’ socioeconomic characteristics (Olaniyan & Okemakinde, 2008), but detailed studies addressing the impact of interest rates on repayment patterns are scarce. This study seeks to fill that gap by evaluating how interest rates affect borrower repayment behavior in Nigeria. 1.3 Objective of the Study The main objective of this research is to evaluate the impact of federal student loan interest rates on borrower repayment behavior in Nigeria. The specific objectives include: i. To identify the factors influencing student loan repayment behavior in Nigeria. ii. To determine the level of default rates on federal student loans among borrowers in Nigeria. iii. To assess how different interest rates affect the repayment behavior of federal student loan borrowers in Nigeria. iv. To investigate the overall repayment behavior of federal student loan borrowers in Nigeria. 1.4 Research Questions The study will be guided by the following questions: i. What factors influence student loan repayment behavior in Nigeria? ii. What is the extent of default rates among federal student loan borrowers in Nigeria? iii. How do varying interest rates impact the repayment behavior of federal student loan borrowers in Nigeria? iv. What characterizes the repayment behavior of federal student loan borrowers in Nigeria? 1.5 Significance of the Study This research is important for the Ministry of Education as its findings could help ensure that interest rate policies do not unintentionally hinder access to education for students from low-income backgrounds. Policymakers will also benefit from understanding the relationship between interest rates and repayment behavior, enabling them to design strategies that balance the sustainable funding of higher education with the goal of reducing default rates and easing financial stress on borrowers. Additionally, this study will contribute to academic literature and serve as a resource for future researchers interested in student loan repayment dynamics. 1.6 Scope of the Study The focus of this study is the effect of federal student loan interest rates on the repayment behavior of borrowers in Nigeria. Empirically, it will identify the factors influencing repayment behavior, measure the default rates among federal student loan borrowers, evaluate the effects of different interest rates on repayment habits, and analyze borrowers’ repayment patterns. Geographically, the study is limited to Obafemi Awolowo University, Ile-Ife, Osun State. 1.7 Limitations of the Study As with any research, this study faced some constraints, including: Time: The researcher had limited time to complete the study due to concurrent academic responsibilities like attending lectures and other coursework. Financial Resources: Conducting this research involved costs such as printing, sourcing materials, and collecting data, which posed financial challenges. Availability of Materials: There was difficulty in finding sufficient literature on the subject matter, due to the limited nature of previous research on this specific topic. 1.8 Definition of Terms Federal Student Loans: Financial assistance provided by the government to help students cover educational expenses. Interest Rates: The percentage charged on a loan amount by the lender to the borrower, usually expressed annually. Repayment Behavior: How borrowers manage their loan repayments, including the timing, frequency, and completeness of payments. Default Rate: The percentage of borrowers who fail to repay their loans as agreed, often resulting in penalties and credit consequences. Socioeconomic Factors: Social and economic characteristics of individuals, such as income, education, employment, and family background, which influence financial decisions and behaviors.