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Updated: June 1, 2014 17:54 IST

Interest matters

Shubashree Desikan
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Typically, these loans can range from Rs. 4 lakh to over Rs. 40 lakh, for higher-education plans ranging from professional courses to studying abroad. Illustration: Satheesh Vellinezhi
The Hindu Typically, these loans can range from Rs. 4 lakh to over Rs. 40 lakh, for higher-education plans ranging from professional courses to studying abroad. Illustration: Satheesh Vellinezhi

As the cost of higher education touches new highs, education loans are nearly unavoidable today. How smooth is the process of getting one?

April was the season of exams, but difficult times are not over yet for those wishing to pursue higher studies. Soon, they will have to remit a huge amount of money in fees and other expenses that pertain to higher education: Tuition fees, lab fees, caution deposits, books, travel — all of these cost dearly, and students and their parents are now bank-hopping, simultaneously, to procure education loans which can cover these expenses and even sometimes, the cost of a two-wheeler. Typically, these loans can range from Rs. 4 lakh to over Rs. 40 lakh, for higher-education plans ranging from professional courses to studying abroad.

It’s a complex issue. In the range of 12 per cent to 13.5 per cent, interest rates offered by a bank for education loans are higher than that for housing loans and vehicle loans. The reason being given is that the latter correlate with the emergence of small and medium-scale enterprises. And also that education loans are “un-secured” loans, unlike the others.

However, there is a moratorium on repayment which extends through the duration of the course plus a period of 6 months to a year (depending on when the student gets a job). So, for an engineering student, the repayment holiday could stretch up to five years.

Staggering numbers

To give a flavour of roughly how this works, a student who takes a loan of Rs 10 lakhs, once he/she gets a job, may land up paying nearly Rs. 19,000 per month in EMIs to repay the loan over a period of seven years. They are advised to limit their EMIs to not more than half their monthly salary. So ideally, a candidate expecting to repay Rs. 19,000 per month would aim for a job that pays a starting salary of about Rs. 40,000 per month. How feasible is this?

Some redeeming features

Students have the option of servicing the loan during the holiday period itself. If they do so, “One per cent of the interest that they have serviced is calculated and recredited to the account and the future interest would be one per cent less.” says Indira Padmini, General Manager, Retail, of Indian Overseas Bank.

Further, the government has introduced some features that will provide a bit of relief to loan-takers, especially weaker sections. For student-loan-takers coming from families whose total income is less than Rs 4.5 lakh per annum, there is the CISS (Central Interest Subsidy Scheme) by which the government repays the interest during the holiday period. “This was for loans taken after April 2009. Recently, the government has agreed to give the interest for candidates who have availed loans prior to April 2009 if the interest is outstanding as on December 31, 2013,” says Ms Indira.

Stumbling blocks

However, getting a bank loan is not easy. There are various stumbling blocks to this. In the government approved scheme, a minimum of 60 per cent marks in the general category, 55 per cent for SC/ST candidates, is needed to be eligible for the loan. While some banks have schemes to offer loans to people who don’t qualify, other banks may not. Said one executive, who did not want to be named, “The cut-off marks for other schemes may only be higher, not less, than the government-recommended rates. Also if the student fails in the first-year exams in college, the bank may discontinue the loan.”

Now, this defeats the very purpose of giving a lease of support to the student with a long-term benefit in mind. But bankers go by safety and security, and very often the so-called creamy persons, or people appearing to be employable or showing a capacity to repay the loans, are favoured, and others, shunned.

This is not a fair situation, when even in the IITs, where some of the most talented students study, we see the trend of a dip in performance in the first year.

There are so many things such as culture and competition to get used to in college that many students, even toppers in their respective schools, may fail courses in the first year.

Basic needs

A comparison between housing loans and education loans is interesting. The amounts can be compared (Rs. 10-30 lakh). Both target what can be thought of as basic needs. Both are influential in shaping the country. So why have a different interest rate for the two? The answer that education loans are un-secured is not entirely convincing, for after all, it is a small percentage of the loans that go into NPA (Non-performing assets, according to one bank official, accounted for about 7 per cent of loans, and 98 per cent of these were loans over Rs. 4 lakh.) There certainly seems to exist a case for the government to reduce the interest rate for education loans and for banks to adopt humane methods in sanctioning and recovering loans. Can this vicious cycle of overpriced education and overburdened young employees be broken?

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