A Sigh of Relief for Student Loan Bearers
Finance minister P. Chidambaram, announced a moratorium period for all education loans taken up to March 31, 2009, and outstandings as of March 31, 2013. He also said the government will take over the liability for outstanding interest as December 31, 2013, but the borrower would have to pay interest for the period after April 1, 2014. Nearly 900,000 student-borrowers would benefit from this move amounting to about Rs 2,600 crore.
As the new academic session kicks off for students pursuing higher education, not only the institute and the course will matter, but also the method of funding. Higher education courses, especially those for professional training or in foreign colleges come with a heavy trailer of fees and travel. In such cases, taking an education loan may be a good option. All banks, public sector as well as private, offer both education as well as vocational loans to students for regular degree as well as post graduate courses by recognized universities in India and abroad. Such loans are an attractive option not only for students from economically weaker sections of the society but even for those from middle or higher middle class due to the easy repayment options and availability of funds.
Reflecting their popularity, official data reveals that public sector banks have disbursed Rs 57,700 crore as education loans and 25,70,254 such accounts were opened by December 31 last year. Of these, the largest number of accounts were opened by State Bank of India 6,14,957, followed by Canara Bank 2,45,155 and Indian Overseas Bank 2,17,045.
Finance minister P Chidambaram has also stressed time and again that education loan is the right of every student and banks should not reject applications of deserving students. Apart from regular post graduation courses such as a Master's degree, the education loan scheme also covers courses such as medicine, engineering and diploma courses like nursing, business management, pilot training and chartered accountancy.
What every Loan bearer needs to know
• Under priority sector guidelines of the RBI, banks can give up to Rs 10 lakh to students for studies in India and Rs 20 lakh for courses abroad. But the Indian Banks' Association — has stated that banks can consider a higher quantum of loans on a course-to-course basis. This means that students studying in institutes that have fees over Rs 10 lakh such as the Indian Institutes of Management or the Indian School of Business may get higher loans sanctioned. This case however is under the good judgment of the bank.
• The education loan scheme covers basic education fees as well as travel expenses, purchase of books and computer, examination and library charges and any other expenses such as study tours and even lodging and boarding expenses. Banks are free to charge interest rate linked to the base rate. A simple interest is charged during the study period and up to commencement of repayment. The repayment period usually starts one year after completing the course or six months after getting a job.
• Borrowers can claim income tax deduction on the interest repaid by them in the previous year on an education loan. An added bonus for students is that education loans are collateral free up to Rs 4 lakh. For loans between Rs 4 lakh and Rs 7.5 lakh, parents have to be a joint borrower and collateral is just in the form of a third party guarantee. For loans above the amount, physical collateral has to be provided.
• Under the Indian Bank's Association guideline, loan repayment could be done over a 10-15 year period. However, banks often force students to pay within three/five years. With the poor economic situation and the lack of employment opportunities, the students are not able to pay huge monthly dues. The banks then classify the accounts as non-performing.
• While banks do prefer timely repayment of education loans, under IBA guidelines, if a student chooses to leave the course mid-way or has to extend the course up to a maximum period of two years, the bank can work out a new repayment schedule. Meanwhile, the government is also working on a credit guarantee fund for education loans that would provide guarantee for such loans up to Rs 7.5 lakh.
Most importantly before taking out an education loan, students should also evaluate the job prospects post completion of the course or alternative means of repayment of the loan. Else, in times of a slowdown such as post-2009, when hiring is low, students can face pressure in payments.
As the new academic session kicks off for students pursuing higher education, not only the institute and the course will matter, but also the method of funding. Higher education courses, especially those for professional training or in foreign colleges come with a heavy trailer of fees and travel. In such cases, taking an education loan may be a good option. All banks, public sector as well as private, offer both education as well as vocational loans to students for regular degree as well as post graduate courses by recognized universities in India and abroad. Such loans are an attractive option not only for students from economically weaker sections of the society but even for those from middle or higher middle class due to the easy repayment options and availability of funds.
Reflecting their popularity, official data reveals that public sector banks have disbursed Rs 57,700 crore as education loans and 25,70,254 such accounts were opened by December 31 last year. Of these, the largest number of accounts were opened by State Bank of India 6,14,957, followed by Canara Bank 2,45,155 and Indian Overseas Bank 2,17,045.
Finance minister P Chidambaram has also stressed time and again that education loan is the right of every student and banks should not reject applications of deserving students. Apart from regular post graduation courses such as a Master's degree, the education loan scheme also covers courses such as medicine, engineering and diploma courses like nursing, business management, pilot training and chartered accountancy.
What every Loan bearer needs to know
• Under priority sector guidelines of the RBI, banks can give up to Rs 10 lakh to students for studies in India and Rs 20 lakh for courses abroad. But the Indian Banks' Association — has stated that banks can consider a higher quantum of loans on a course-to-course basis. This means that students studying in institutes that have fees over Rs 10 lakh such as the Indian Institutes of Management or the Indian School of Business may get higher loans sanctioned. This case however is under the good judgment of the bank.
• The education loan scheme covers basic education fees as well as travel expenses, purchase of books and computer, examination and library charges and any other expenses such as study tours and even lodging and boarding expenses. Banks are free to charge interest rate linked to the base rate. A simple interest is charged during the study period and up to commencement of repayment. The repayment period usually starts one year after completing the course or six months after getting a job.
• Borrowers can claim income tax deduction on the interest repaid by them in the previous year on an education loan. An added bonus for students is that education loans are collateral free up to Rs 4 lakh. For loans between Rs 4 lakh and Rs 7.5 lakh, parents have to be a joint borrower and collateral is just in the form of a third party guarantee. For loans above the amount, physical collateral has to be provided.
• Under the Indian Bank's Association guideline, loan repayment could be done over a 10-15 year period. However, banks often force students to pay within three/five years. With the poor economic situation and the lack of employment opportunities, the students are not able to pay huge monthly dues. The banks then classify the accounts as non-performing.
• While banks do prefer timely repayment of education loans, under IBA guidelines, if a student chooses to leave the course mid-way or has to extend the course up to a maximum period of two years, the bank can work out a new repayment schedule. Meanwhile, the government is also working on a credit guarantee fund for education loans that would provide guarantee for such loans up to Rs 7.5 lakh.
Most importantly before taking out an education loan, students should also evaluate the job prospects post completion of the course or alternative means of repayment of the loan. Else, in times of a slowdown such as post-2009, when hiring is low, students can face pressure in payments.
