The government may increase the education cess in the Budget as part of a plan to create a corpus to provide cheap loans to students from low-income families.

This was discussed at a meeting chaired by the Prime Minister's Principal Secretary, TKA Nair, on January 12 with the Indian Bank Association, industry bodies and human resource development ministry officials.

The meeting examined the possibility of the government providing banks with subsidies to reduce interest rates on educational loans for students from low-income families by 4 percentage points. Current rates on such loans range from 10 per cent to 15 per cent.

The move is broadly seen as a means to strengthen affirmative action for deserving students from low income families. Education, along with agriculture, is a designated priority sector to which banks have to lend 40 per cent of their loan portfolios.

A final decision, however, was not taken at the meeting. The present rate of the cess, imposed in 2004-05, is 2 per cent. It is a surcharge on total payable tax, not on total income. It is imposed on income tax, corporation tax, excise, Customs duties and service tax. The education cess yields Rs 4,000-5,000 crore (Rs 40 to Rs 50 billion) a year.

The discussions broadly focused on solving the two major problems of high interest rates and a low repayment period of around five years that have been identified as major deterrents for students.

Issues linked with determining eligibility for concessional credit, enlarging the moratorium and the repayment period were also discussed at the meeting.