Securing their future

A good education costs a lot these days. And if you include the pre-education costs a student incurs, the sum looks like a small fortune. Take the case of 20-year-old Abhinav Padhy, a final-year student of Business Economics in the University of Delhi. Last year, he spent more than Rs 40,000 towards coaching for business management, application forms and admission tests. “I applied to about 10 institutes. Given the tough competition, I had to keep several options open,” he says.

It was not easy for Padhy’s middle class family to spend such a large sum. But this is a typical story that plays out across the country. Besides, education costs have shot up. Premier institutes like the seven Indian Institutes of Technology (IITs) and the six Indian Institutes of Management (IIMs) have nearly doubled fees for the 2008-09 academic year, prompting students to look at education loans. Kanoo Sahajwala, 24, is one such student.

After securing admission to the oneyear diploma in management at Chennai’s Great Lakes Institute of Management (GLIM), Sahajwala, checked with the State Bank of India (SBI) and HDFC Bank for education loans, before settling on Indian Bank. “Both SBI and HDFC Bank were offering competitive interest rates, but SBI asked for third-party guarantee and HDFC Bank wanted collateral. Since Indian Bank has a tie-up with GLIM, the loan was sanctioned without any collateral or third-party guarantee,” says Sahajwala.

A pre-approved institute makes things easier, as Brijesh Yadav, 28, also found out. Brijesh applied for a study loan from SBI after being selected for the one-year course of GLIM last year, but the bank was charging a higher rate. “Since GLIM is not recognised by AICTE (All India Council for Technical Education), SBI offered me a loan at 12 per cent interest per annum and asked for a third-party guarantor. So, I took a Rs 4-lakh loan from Indian Bank at an interest of 11 per cent per annum, which came without any conditions,” he says. Yadav will be paying an equated monthly installment (EMI) of Rs 9,800 per month (for a period of five years) from July 2008.

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It’s easy to get a loan if the course is approved by AICTE, or if a bank has a special tie-up with the college in question. Says Nandan Srivastava, General Manager, Retail Banking, Bank of Baroda: “Courses approved by AICTE or the relevant government authority are considered eligible for education loans.

Bridging the education gap Seven things you should know about study loans. According to RBI regulations, only courses approved by AICTE or any other authority are eligible for loans, but this regulation can be relaxed depending on an institute’s credibility Interest rates vary between banks. Rates depend on the bank’s tie-ups with institutes Many banks offer loans on floating rate system and several banks charge less than their respective prime lending rates (BPLRs) Banks also provide free insurance cover with the loan If interest is paid during the study and moratorium period, a concession of 1 per cent in interest rate may be allowed after the expiry of the moratorium Female, SC/ST and physically challenged borrowers are allowed 0.5-1 per cent interest concession No processing fee is charged for studying in India; many banks do not charge prepayment fees

However, institutes of repute are also eligible, even if they are not approved.” At the same time, banks favour certain conventional professional courses like business management and engineering over others like media studies. Pavitra Kumar, 22, had a tough time finding a loan to fund her one-year Media Management course from the University of Westminster, London.

“Some banks hesitated to sanction a loan for the course saying that media professionals do not earn enough to pay off a loan,” says Kumar. After running from pillar to post, she managed to get a loan of Rs 8 lakh from Vijaya Bank at 11 per cent.

PSUs ahead

It is an open secret that private sector banks are not as aggressive as their public sector counterparts in the education space. “Chances of defaulting in an education loan are higher because it is difficult to track the borrower. In case a borrower fails to pay back a loan on a house or a car, the bank can impound the property. But in case of education loans, we have fewer legal options,” says a senior Axis Bank executive on condition of anonymity. But such claims are not echoed by public sector banks. M.B.N. Rao, CMD, Canara Bank, says that there has been no increase in defaults over the past two years.

Kanoo Sahajwala Student, Great Lakes Institute of Management Course: PG Programme in Management Loan amount: Rs 5.6 lakh Bank: Indian Bank Interest rate: 11% p.a. Special features: Kanoo’s loan was made cheaper by 2 per cent, thanks to GLIM’s special arrangement with Indian Bank

Despite the credit squeeze, banks have not increased their lending rates over the past one year, which is good news for students. Says Sudhir Jade, Chief Manager, Retail Banking (Head Office), Bank of India: “The interest rate charged by a bank is linked to its BPLR. But we have consciously kept interest rates for education loans a few percentage points below our BPLR of 12.75 per cent and there is no hike in the offing.” Other bankers maintain the same view. “We have no plans to increase the interest rate on study loans,” says Srivastava. Rao says that students need not worry about any credit squeeze as education loans are a priority. Besides, the rate of interest from PSU banks are still hovering in the reasonable range of 11-12 per cent.

In addition to this, the government is willing to chip in to make the loan burden easier for the borrower. It is considering a proposal to stand in as a counter-guarantor so that the financial burden does not fall entirely on the family.

Banks allow a repayment moratorium during the course of study, or till six months after a student gets a job. But it’s better to start paying back the loan immediately if your financial position allows it.

The interest costs compound and the longer you take, the more your overall re-payment liability is. “To reduce liability, a borrower should begin paying the interest from the beginning of the course. Upon completion, his EMI will be on the principal amount only,” says Yadav. “Remember banks charge compound interest on study loans.”