Finance Your Way To Education You Always Dreamed Of!

Sidhant Ahooja, Regional Manager North (MBO), Levi Strauss & Co, is an MBA from Singapore. His father is no millionaire, nor did his grandfather leave him any legacy to pursue his dream Education. The obstacle of funds however did not curtail his aspirations and he flew abroad to make his dreams come true. All thanks to the Rs 15 lakh Loan he took from Indian bank in 2006.

“Post my engineering I had a decent job with Coca Cola, but my aspirations were bigger than that. I quit a 50k job in 2006, took a huge loan and pursued an MBA. Initial two years after the MBA were very tough but it’s better now since I progressed in career with time. Even I had my apprehensions about repayment of loan, interest and was afraid of managing my funds but after 8-10 years when you look back, it’s always going to be worth it!”

The smile on Siddhant’s face, his confident and happy disposition or the satisfaction he feels when he shoulders the full responsibility of his household – everything – is a tell-tale sign of a man who arrived! All thanks to the support extended by the Indian Banking System.

Education is central to the Human Resource Development and empowerment in any country. Indian Government has marked development of human capital as a national priority and has framed appropriate policies in such a manner that no deserving student is denied opportunity to pursue higher education for want of financial support, provided you are going to attend your education from an institute that is viewed by banks as a place that may earn you a decent placement. Even if you manage to secure a loan for some private (and shady) institute, you will end up doing a disservice to you, for it may be difficult to repay the loan.

Hence, always be very particular of an institute’s credentials, placement track record and industry standing. You don’t want a Tri-Valley type of case happening with you. In fact, it is true of many students who go to middle-rung universities from countries such as the UK on educational loans. The laws and economy in the UK are comparatively more restrictive to afford after-job placement to all students. Many of such students come back, only to get employed in BPOs. Hence, due-diligence on an institute’s standing is important. Countries such as New Zealand and Canada offer more conducive job markets.

Most nationalized, private and foreign banks in India offer education finance to students. The Reserve Bank of India prescribes the specifics (amount, rate, repayment period) of education loans and the government provides a two per cent subsidy on these loans to the banks. The icing on the cake is that a student can take loan not only to cover the cost of the tuition fee but also for meeting almost all the expenses involved in the pursuit of academics. And if the loan amount is less than Rs 4 lakh (in case of Public Banks), the student does not even need to provide any collateral security or margin! (In Sidhant’s case, the loan came on mortgage of property.)

Most of the Public Sector Banks in India have categorized Student Loans in two categories.

For studies in India -

Loan less than Rs 4 lakh: No Security needed

Loan between Rs 4-7 lakh: 5% Margin and with third-party guarantee*

For Overseas study loans/Loans over Rs 7 lakh: Usually sanctioned against fixed deposits, NSC certificates, property worth the loan amount and a margin amount of 15%.

(* - The third-party guarantee can come from an uncle, neighbor or friend standing guarantee for the full amount)

Things every Student must know before applying for Education loan

• Know the Banks – As such, both Public and Private Banks are enthusiastic about Education Loans and are very cooperative. Those who think that taking loan from Public Banks would involve much hassles or paperwork, it’s time to refresh your beliefs! Sidhant’s Loan came from a Public Bank and was disbursed in flat TEN DAYS!
• Know about your Repayment period – Repayment generally starts one year after the Course period or six months after the Job, whichever is earlier. Some banks allow you a moratorium on payment of interest. This means that you can defer payments of even the interest during this period. Hence, there is no need to pay anything to the bank at all – till 6 months after the course is complete, or you get a job (whichever is earlier). If you opt for this option, then the interest is compounded quarterly and added to the principal sum for repayment. This option carries a higher rate of interest, but is a boon to those who cannot repay the loan during the course period.
• Know your Interest – Public banks generally charge 11 to 12.5% as Rate of Interest for loans less than Rs 4 lakhs. For loans higher than this amount, the rate varies between 13 to 15% p.a. Some banks, such as SBI, also give you a choice between fixed and floating interest rate. Whereas, private and foreign banks offer loans with a fixed interest rate, some banks charge interest on a daily or monthly reducing balance. Lesser rates of interests are charged from female students by some banks.
• Know your Prepayment options – Banks offer lower interest rates if you start repayment during the moratorium period. Unlike other loans, education loans do not attract prepayment penalty. If you find yourself able to prepay in the early years of your career, you can pay off the entire outstanding loan amount without any penalty.
• Know about Paperwork – All students are required to submit mark sheets of last qualifying examination, poof of admission scholarship, schedule of expenses for the specified course, his/her bank account statement for the last six months, an income-tax assessment order for the previous two years (if applicable/of parent), a brief statement of assets and liabilities, of the co-borrower, which is usually the parent or guardian and proof of income, if any.

Indeed, Indian banks have identified Education sector as a priority sector and pursue it as a Corporate Social Responsibility making a contribution towards building a more skill-intensive and progressive India. Pradeep Malhan, Chief Manager at Oriental Bank of Commerce, New Delhi puts forth his views as, 

“Education Loans aim at providing financial support in empowering Indian youth with education and Professional skills. In my 25 years of serving with Indian Banking System, I have always noticed banking people as very positive towards granting loans for education purpose. Each one of us realizes the value of education ensures that no deserving and meritorious students should be denied opportunities for want of funds.”

Pradeep Malhan’s Tip for Students opting for Loan:

"Ideally, it is better for students to take a loan from a bank located at their place of study than at the place of their residence, unless it concerns overseas studies. This is because it will give them better access to funds if they take a loan from the place of their study. Also, they should make sure the repayment period starts only after six to twelve months after they begin their working life."

That sounds good but there’s still a long way to go! There are certain things which still need HRD Minister’s full attention:

Banks usually prefer to give Loans for Management courses. Medical, Engineering and Technology courses rank next. CA, Law and other professional courses also get preferential clearance but banks are still not very open to newer vistas of Education or less popular streams. Banks don’t provide loans for students with a bachelor's/master's in Arts. Also, for courses where employment prospects are less (as per Bank’s own evaluation), loans are sanctioned on the basis of the parents' income. So that is one area where banking reforms can be targeted next.

And finally, the most glaring gap – PRIVATE BANKS do not extend Education loans to meritorious or deserving candidates unless and until they provide some  collateral security or guarantee from immediate family. Even if the loan amount is less than Rs 4 lakhs, every candidate is required to submit some financial security!

So that means, private banks are not going to disburse significant amount of education loans except to the well-heeled who can provide collateral/guarantee. What do you suggest a deserving but poor student should do in this case? Should he do the rounds of some NGO for grants/aid or try to wake up some politician/activist to take his cause?

 Private Banks are equal partners of Indian banking System and they should come forward in this aspect to shoulder their responsibility because higher education and vocational training are the best poverty alleviation tools in the long run. Let’s voice our thoughts on this.

You must not let money come in way of your dreams. As they say, where there is a will, there is a way. Educational loans won’t only help your realize your cherished dreams, high inflation rates in economies like India also means that taking loans in penny-wise, too. It not only helps one have a check on time value of money, but it also affords incentives in income tax, when one begins with their first job, till the time payment schedule continues.