Source :money :out look india:April 20.2011
Expenses Covered By Education Loan
With new avenues of employment opening up, specialised courses are cropping up by the day. There is the promise of a flying career, but it doesn’t come on a platter. So, does it mean that you should let your dreams die because the resources at your disposal aren’t enough? The answer is no, because help is round the corner.
Take the case of Ranjan Kumar, who was working with the customer service department of a multinational firm when he decided to switch gears in 2006 and pursue an MBA. While Ranjan had saved enough to meet his recurring expenses, he needed to finance his MBA course fee.
So, he applied for a five-year education loan from the State Bank of India (SBI) with his father as a guarantor. He agreed to service the interest during the moratorium period of the loan from the bank, which allowed him a 1 per cent interest rate reduction. Till now, Ranjan has repaid his loan for two years and three months. During this period, he has also built a corpus from which he can prepay his education loan should he want to.
But, as he is getting income tax benefit on the interest repayment of the loan and as the rate is relatively low, he has decided to continue with regular repayment. He has, instead, deployed his surplus to generate better returns.
It’s not just the new professional courses that are burning a hole in parents’ pockets; even the cost of traditional courses has become nightmarishly high.
For instance, IIM Ahmedabad, which charged a fee of Rs 12.5 lakh for a two-year PGP till 2009, raised it to Rs 13.75 lakh in 2010. Currently, it’s Rs 14.45 lakh. As education loans fall under the priority sector lending, banks are required to meet their target mandated by the Reserve Bank of India (RBI) and government.
Public sector banks have been more forthcoming in giving education loans than their private sector counterparts. Says Rishi Mehra founder-director, Deal4-loans.com: “Public sector banks have shown a growth of about 20 per cent year-on-year in this portfolio. Private banks haven’t delivered growth in this sector.”
Talking about the popularity and growth of education loans, Bhaskar Niyogi, chief general manager, State Bank of India, says: “There has been an average growth of 35-40 per cent in education loans during the past five years. With the government promoting higher education, further growth is anticipated. SBI has a market share of 25 per cent of all educational loans in the country. The average CAGR is also around 38 per cent.”
Plan early
Despite the government’s push for them, getting an education loan is not really an easy task as banks consider them a risky asset. Says Prashant A. Bhonsle, country head, Credila Financial Services, an HDFC company: “One of the challenges that lenders face in giving an education loan is evaluating the quality of the course and the institute. Moreover, tracking and collection in this segment where the student is constantly shifting jobs and cities, especially during the first few years of the career, is also difficult. Therefore, sometimes, lending without a proper understanding of the above facts may impact the portfolio performance negatively.” As banks don’t have access to full details of new courses or institutes, it may become relatively difficult for the students to get loans, adds Bhonsle.
The recent spurt in education loan defaults has made banks adopt a more cautious approach. The majority of the defaults occur in the below-Rs 4-lakh category, where no security is required. Banks are doing their homework to address this concern.
As Niyogi says: “The Indian Banks’ Association (IBA) has taken up with the Union Ministry of Finance the issue of setting up a guarantee scheme for unsecured loans up to Rs 4 lakh, on the lines of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).” Niyogi says that the HRD ministry is in the process of dematerialising the educational awards/certificates and setting up a depository for maintaining the records in dematerialised form. Also, the permanent account number (PAN) or unique identity (UID) number may be obtained from a student for the purpose of tracking.
Guarantee or not, the first step for banks will always be doing due diligence before sanctioning your loan. A better understanding of the things which determine the approval of a loan application will help you plan better to ensure that you don’t face unnecessary problems.
Time it well
Admissions to any course is a time-bound process. If you don’t arrange the required fee in the stipulated time, all your efforts will come to a nought. Hence, planning well in advance is the key. For this, you may like to visit the bank to obtain a checklist of documents required at the time of applying for a loan. You can also get the information on the website of the concerned bank, or of the institution from where you wish to pursue a course if it has a tie-up with a bank. If you have an existing relationship with a bank and enjoy a good reputation with it, that makes the process all the more easier.
Do some fact-finding
When the institution in question is as reputed as an IIT or an IIM, there’s little that you need to worry about. However, it’s a different story when it comes to courses or institutions which are not that popular. Instances of students falling prey to hollow promises by education institutions are not rare. Many students get swayed by advertising gimmicks and end up paying the initial amount to secure admission, only to find later that banks are unwilling to finance the study. Says Niyogi: “While opting for a course, a student should check whether the institute or the course is recognized by AICTE or UGC or other governing councils, such as IMC, INC, and so on. Also check the reputation of the institute in the market and its placement record.”
Talking about the need to select the right institution, Arvind Hali, head, retail assets and credit cards, Dhanlaxmi Bank, says: “Assuming that the student is meritorious, he should look at institutions which have a good standing in terms of track record and placement, especially for job-oriented professional and technical courses. Go to an institution which has a merit-based system for accepting students.” Instead of taking promises on their face value, always try to get first-hand information about the placement record from students and alumni. This could be done through blogs and social networking sites.
Check out the fee
Even if an education loan is readily available to you, it shouldn’t stop you from ensuring that the institute is not charging exorbitantly. The fees you pay should be in line with what you expect to draw after finishing the course. Says Hali: “You have to look at the fee that an institute is charging vis-a-vis the kind of returns that will come. In certain courses, the salary a person draws is not commensurate with the kind of fee he has paid.” It hardly makes sense for you to pay a fee of Rs 8 lakh for a course which would get you a job of just Rs 15,000 per month as you would end up paying your entire salary for loan repayment.
How much loan?
While deciding the loan amount, be aware of ground realities as far as the repayment period is concerned. A proper research would give you an idea of the kind of job and salary you could expect. As far as possible, try to keep the loan amount in a range where the repayment EMI is not more than 30 per cent of your future monthly income.
Studying Abroad
The maximum amount of loan which banks in India provide for studies abroad is Rs 20 lakh. While courses from reputed institutions overseas offer great career prospects, the fee they charge is generally higher than Rs 20 lakh. Is this the end of the road for meritorious students who have done exceedingly well to qualify for these institutes? Not any more, as Credila, an HDFC company which deals only with education loans, provides students loans above Rs 20 lakh also.
Subsidy for girls
In keeping with the government’s drive to promote literacy among girls, many banks provide special schemes with interest rate subsidy for girl students. For instance, Bank of Baroda gives a rebate of 1 per cent on interest for girl students. Don’t miss out on such schemes if you are a girl student or are taking a loan for your daughter.
Margin money and collateral
Margin money is the amount you need to fund through your own sources. Banks do not ask for any margin money for loans up to Rs 4 lakh. For loans above Rs 4 lakh, they seek margin money of 5 per cent of the total amount for study in India and 15 per cent for overseas study. On the collateral front, banks accept third-party guarantee for loans above Rs 4 lakh and up to Rs 7.5 lakh. For loans above Rs 7.5 lakh, they ask for tangible securities equivalent to 100 per cent of the loan amount as collateral, such as property, fixed deposits, bonds, and so on.
Pay interest to reduce cost
The time between the disbursal of the first instalment of the fee and the completion of the course is called moratorium. During this period, the bank charges a simple interest on the disbursed loan amount. Parents who have already squeezed their resources face a dilemma: whether to pay the interest during this moratorium period, or to let the interest accumulate so that the student can start repaying the whole amount when he/she gets a job.
For courses of long duration, such as 4-5 years, not servicing the interest during moratorium could prove costly as the accumulated interest can become a substantial amount. This would lead to an unnecessary burden on the student right at the start of his or her career.
Says Bhonsle: “If you don’t pay the interest during moratorium, it gets accrued and compounded and the student may end up paying more over the entire tenure of the loan. Second, it is a very good way of building a positive credit history for getting future loans, such as two-wheeler, car, home and personal loans, at much better rates.” Also, it gives you a benefit of 1 per cent interest rate reduction.
Interest-free moratorium
There is some special cheer for meritorious students. The government of India has launched a scheme called ‘Education Loan Interest Subsidy Scheme’, especially designed to provide interest subsidy for the period of moratorium on educational loans taken by students from economically weaker sections. Under this scheme, you don’t have to pay any interest during your studies as it would be borne by the government.
When you start repayment, you need to pay the original amount borrowed and the interest that will be charged only after moratorium.
The maximum loan limit under this scheme would be Rs 10 lakh. Says Niyogi: “Under this scheme, loans should be taken for pursuing higher technical/professional courses in India within the IBA Model Education Loan scheme. The gross parental income should not be more than Rs 4.5 lakh per annum.
The scheme is for disbursements made during the 2009-10 academic year and onwards.” This subsidy will be available only to students enrolled in recognised technical/professional courses (after XII) in India in educational institutions established by Acts of Parliament, other institutions recognised by the concerned statutory bodies, IIMs and other institutions set up by the Central/state government.
There would be a tag or marker on the degree and marksheet of the student indicating his repayment liabilities. An electronic tag will enable employers to identify loanees.
Stay on course of repayment
At the beginning of their careers, many students may not realise the importance of having a good credit history. They need to be sensitised about the need to repay the loan on a regular basis. Says Bhonsle: “We inform students that it (irregular payments) will make it extremely difficult for them to not only avail other loans, but also hamper their future employability if employers look into their credit record. On the contrary, if the repayment history is good, there are much higher chances of them getting other financial products at most attractive prices.”
Tax benefit
Education loans provide a tax-saving opportunity, both for the parent and the student under Section 80E of the Income Tax Act. Parents can enjoy tax benefits in the moratorium period during which they pay interest on the loan. After that, the student can avail unlimited tax benefit on the interest portion of the EMIs.
If used wisely, an education loan can really work as a facilitator to a bright future for you.
- Fees payable to college/school/hostel
- Examination/library/laboratory fees
- Purchase of books/equipment/instruments/uniform
- Caution deposit/building fund/refundable deposit
- Travel expenses/passage money for studies abroad
- Purchase of computers/laptops considered necessary for completion of course
- In some cases, cost of a two-wheeler, up to certain limit
- Any other expenses required to complete the course, such as study tours and project work
***
The Groundwork- Find out whether banks provide loan for the course you wish to pursue. Ensure that the banker understands it if you want to fund it through a loan.
- Check the accreditation of the institution you are seeking admission to: whether it is approved by authorities concerned (UGC, AICTE, and so on).
- If you plan to repay the loan from your own earnings, verify the institute’s placement record.
- Compare the fees vis-Ã -vis the expected salary following the course’s completion.
- Find out if the institute has a tie-up with banks for education loans. This expedites the process.
- Consult several banks for the most favourable rate of interest.
- If the loan amount exceeds Rs 4 lakh, think of the securities at your disposal that you may offer to pledge to the bank.
- Arrange for guarantor(s) (parents/siblings/spouse) with adequate annual income and good credit history.
- Understand the moratorium period. Make note of the interest rate structure during the moratorium period and following the start of repayment.
- If possible, arrange for interest payment during the moratorium period. This will reduce the interest rate by 1 per cent and also lower your burden when repayment starts.
- When deciding on the loan amount and repayment tenure, make sure that the EMI does not exceed 20-30 per cent of your future monthly income.
***
The cost of education is rising—and how! As the Indian economy expands at a rapid pace, it’s becoming increasingly tough for most Indians to fund their education from their own means. With new avenues of employment opening up, specialised courses are cropping up by the day. There is the promise of a flying career, but it doesn’t come on a platter. So, does it mean that you should let your dreams die because the resources at your disposal aren’t enough? The answer is no, because help is round the corner.
Take the case of Ranjan Kumar, who was working with the customer service department of a multinational firm when he decided to switch gears in 2006 and pursue an MBA. While Ranjan had saved enough to meet his recurring expenses, he needed to finance his MBA course fee.
So, he applied for a five-year education loan from the State Bank of India (SBI) with his father as a guarantor. He agreed to service the interest during the moratorium period of the loan from the bank, which allowed him a 1 per cent interest rate reduction. Till now, Ranjan has repaid his loan for two years and three months. During this period, he has also built a corpus from which he can prepay his education loan should he want to.
But, as he is getting income tax benefit on the interest repayment of the loan and as the rate is relatively low, he has decided to continue with regular repayment. He has, instead, deployed his surplus to generate better returns.
It’s not just the new professional courses that are burning a hole in parents’ pockets; even the cost of traditional courses has become nightmarishly high.
For instance, IIM Ahmedabad, which charged a fee of Rs 12.5 lakh for a two-year PGP till 2009, raised it to Rs 13.75 lakh in 2010. Currently, it’s Rs 14.45 lakh. As education loans fall under the priority sector lending, banks are required to meet their target mandated by the Reserve Bank of India (RBI) and government.
Public sector banks have been more forthcoming in giving education loans than their private sector counterparts. Says Rishi Mehra founder-director, Deal4-loans.com: “Public sector banks have shown a growth of about 20 per cent year-on-year in this portfolio. Private banks haven’t delivered growth in this sector.”
Talking about the popularity and growth of education loans, Bhaskar Niyogi, chief general manager, State Bank of India, says: “There has been an average growth of 35-40 per cent in education loans during the past five years. With the government promoting higher education, further growth is anticipated. SBI has a market share of 25 per cent of all educational loans in the country. The average CAGR is also around 38 per cent.”
Plan early
Despite the government’s push for them, getting an education loan is not really an easy task as banks consider them a risky asset. Says Prashant A. Bhonsle, country head, Credila Financial Services, an HDFC company: “One of the challenges that lenders face in giving an education loan is evaluating the quality of the course and the institute. Moreover, tracking and collection in this segment where the student is constantly shifting jobs and cities, especially during the first few years of the career, is also difficult. Therefore, sometimes, lending without a proper understanding of the above facts may impact the portfolio performance negatively.” As banks don’t have access to full details of new courses or institutes, it may become relatively difficult for the students to get loans, adds Bhonsle.
The recent spurt in education loan defaults has made banks adopt a more cautious approach. The majority of the defaults occur in the below-Rs 4-lakh category, where no security is required. Banks are doing their homework to address this concern.
As Niyogi says: “The Indian Banks’ Association (IBA) has taken up with the Union Ministry of Finance the issue of setting up a guarantee scheme for unsecured loans up to Rs 4 lakh, on the lines of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).” Niyogi says that the HRD ministry is in the process of dematerialising the educational awards/certificates and setting up a depository for maintaining the records in dematerialised form. Also, the permanent account number (PAN) or unique identity (UID) number may be obtained from a student for the purpose of tracking.
Guarantee or not, the first step for banks will always be doing due diligence before sanctioning your loan. A better understanding of the things which determine the approval of a loan application will help you plan better to ensure that you don’t face unnecessary problems.
Time it well
Admissions to any course is a time-bound process. If you don’t arrange the required fee in the stipulated time, all your efforts will come to a nought. Hence, planning well in advance is the key. For this, you may like to visit the bank to obtain a checklist of documents required at the time of applying for a loan. You can also get the information on the website of the concerned bank, or of the institution from where you wish to pursue a course if it has a tie-up with a bank. If you have an existing relationship with a bank and enjoy a good reputation with it, that makes the process all the more easier.
Do some fact-finding
When the institution in question is as reputed as an IIT or an IIM, there’s little that you need to worry about. However, it’s a different story when it comes to courses or institutions which are not that popular. Instances of students falling prey to hollow promises by education institutions are not rare. Many students get swayed by advertising gimmicks and end up paying the initial amount to secure admission, only to find later that banks are unwilling to finance the study. Says Niyogi: “While opting for a course, a student should check whether the institute or the course is recognized by AICTE or UGC or other governing councils, such as IMC, INC, and so on. Also check the reputation of the institute in the market and its placement record.”
Talking about the need to select the right institution, Arvind Hali, head, retail assets and credit cards, Dhanlaxmi Bank, says: “Assuming that the student is meritorious, he should look at institutions which have a good standing in terms of track record and placement, especially for job-oriented professional and technical courses. Go to an institution which has a merit-based system for accepting students.” Instead of taking promises on their face value, always try to get first-hand information about the placement record from students and alumni. This could be done through blogs and social networking sites.
Check out the fee
Even if an education loan is readily available to you, it shouldn’t stop you from ensuring that the institute is not charging exorbitantly. The fees you pay should be in line with what you expect to draw after finishing the course. Says Hali: “You have to look at the fee that an institute is charging vis-a-vis the kind of returns that will come. In certain courses, the salary a person draws is not commensurate with the kind of fee he has paid.” It hardly makes sense for you to pay a fee of Rs 8 lakh for a course which would get you a job of just Rs 15,000 per month as you would end up paying your entire salary for loan repayment.
While deciding the loan amount, be aware of ground realities as far as the repayment period is concerned. A proper research would give you an idea of the kind of job and salary you could expect. As far as possible, try to keep the loan amount in a range where the repayment EMI is not more than 30 per cent of your future monthly income.
Studying Abroad
The maximum amount of loan which banks in India provide for studies abroad is Rs 20 lakh. While courses from reputed institutions overseas offer great career prospects, the fee they charge is generally higher than Rs 20 lakh. Is this the end of the road for meritorious students who have done exceedingly well to qualify for these institutes? Not any more, as Credila, an HDFC company which deals only with education loans, provides students loans above Rs 20 lakh also.
Subsidy for girls
In keeping with the government’s drive to promote literacy among girls, many banks provide special schemes with interest rate subsidy for girl students. For instance, Bank of Baroda gives a rebate of 1 per cent on interest for girl students. Don’t miss out on such schemes if you are a girl student or are taking a loan for your daughter.
Margin money and collateral
Margin money is the amount you need to fund through your own sources. Banks do not ask for any margin money for loans up to Rs 4 lakh. For loans above Rs 4 lakh, they seek margin money of 5 per cent of the total amount for study in India and 15 per cent for overseas study. On the collateral front, banks accept third-party guarantee for loans above Rs 4 lakh and up to Rs 7.5 lakh. For loans above Rs 7.5 lakh, they ask for tangible securities equivalent to 100 per cent of the loan amount as collateral, such as property, fixed deposits, bonds, and so on.
Pay interest to reduce cost
The time between the disbursal of the first instalment of the fee and the completion of the course is called moratorium. During this period, the bank charges a simple interest on the disbursed loan amount. Parents who have already squeezed their resources face a dilemma: whether to pay the interest during this moratorium period, or to let the interest accumulate so that the student can start repaying the whole amount when he/she gets a job.
For courses of long duration, such as 4-5 years, not servicing the interest during moratorium could prove costly as the accumulated interest can become a substantial amount. This would lead to an unnecessary burden on the student right at the start of his or her career.
Says Bhonsle: “If you don’t pay the interest during moratorium, it gets accrued and compounded and the student may end up paying more over the entire tenure of the loan. Second, it is a very good way of building a positive credit history for getting future loans, such as two-wheeler, car, home and personal loans, at much better rates.” Also, it gives you a benefit of 1 per cent interest rate reduction.
Interest-free moratorium
There is some special cheer for meritorious students. The government of India has launched a scheme called ‘Education Loan Interest Subsidy Scheme’, especially designed to provide interest subsidy for the period of moratorium on educational loans taken by students from economically weaker sections. Under this scheme, you don’t have to pay any interest during your studies as it would be borne by the government.
When you start repayment, you need to pay the original amount borrowed and the interest that will be charged only after moratorium.
The maximum loan limit under this scheme would be Rs 10 lakh. Says Niyogi: “Under this scheme, loans should be taken for pursuing higher technical/professional courses in India within the IBA Model Education Loan scheme. The gross parental income should not be more than Rs 4.5 lakh per annum.
The scheme is for disbursements made during the 2009-10 academic year and onwards.” This subsidy will be available only to students enrolled in recognised technical/professional courses (after XII) in India in educational institutions established by Acts of Parliament, other institutions recognised by the concerned statutory bodies, IIMs and other institutions set up by the Central/state government.
There would be a tag or marker on the degree and marksheet of the student indicating his repayment liabilities. An electronic tag will enable employers to identify loanees.
Stay on course of repayment
At the beginning of their careers, many students may not realise the importance of having a good credit history. They need to be sensitised about the need to repay the loan on a regular basis. Says Bhonsle: “We inform students that it (irregular payments) will make it extremely difficult for them to not only avail other loans, but also hamper their future employability if employers look into their credit record. On the contrary, if the repayment history is good, there are much higher chances of them getting other financial products at most attractive prices.”
Tax benefit
Education loans provide a tax-saving opportunity, both for the parent and the student under Section 80E of the Income Tax Act. Parents can enjoy tax benefits in the moratorium period during which they pay interest on the loan. After that, the student can avail unlimited tax benefit on the interest portion of the EMIs.
If used wisely, an education loan can really work as a facilitator to a bright future for you.
Loanshelp in getting the students help to study....
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