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Education loan gets a big boost

Education Loans, Finances & Budgets, Higher Education


The Indian Express

Nearly nine lakh borrowers stand to benefit from the Interim Budget 2014-15 when finance minister P Chidambaram announced a moratorium period for all education loans taken up to March 31, 2009, and outstanding as of March 31, 2013.

As the new academic session kicks off over the next few months, 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 tend to come with a heavy expenditure on 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 recognised 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.

Education loan portfolio of banks have been rising steadily given that it is one of the priority sectors under which banks are mandated to lend by the Reserve Bank of India. The finance ministry also keeps a tight watch on lending by public sector banks under the scheme.

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.

The Model Education Loan Scheme was prepared in 2001, which was then circulated to banks for implementation by the Reserve Bank of India (RBI) in April 2001. The scheme, since then has seen some changes and a massive overhaul was done in September 2001 based on needs of students and suggestions of stakeholders.

The size of the Indian education industry is pegged at Rs 3,833.1 billion in 2012-13 by CARE Ratings, of which higher education is estimated to contribute nearly 60 per cent.

Meanwhile, according to India Ratings, timely availability of education loans have not only given a boost to the sector but has also helped affordability given the periodic revision in fees by both the government and private colleges.

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 — the umbrella body for all lenders, has said 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.

“But this is largely on the discretion of the bank and is based on the course being studied and the institute,” said an official with a state-owned lender.

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.

Depending upon the amount, banks typically expect the loan to be repaid within 10 to 12 years of the start of the repayment.

Borrowers can also 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, a physical collateral has to be provided.

The education loan scheme got a further fillip in the Interim Budget 2014-15 when finance minister P Chidambaram announced a moratorium period for all education loans taken up to March 31, 2009, and outstanding as of March 31, 2013. Nearly 9,00,000 student-borrowers would benefit to the tune of around Rs 2,600 crore.

“This proposal was based on public demand. The finance minister received a large number of letters where people who had taken student loans prior to April 1, 2009 felt they were discriminated against as they could not avail the interest subsidy scheme. Basically, what was happening was that many of these doctors and engineers were being considered as NPAs on passing out and could not get a new loan to set up something new,” said a senior finance ministry official.

According to finance ministry calculations, there were 8.94 lakh such pending accounts of which the total interest was Rs 6,000 crore.

Though the move has helped students who graduated earlier, bankers caution that such a moratorium should not be the main reason for students to opt for an education loan.

“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,” said a banker on conditions of anonymity.

Industry sources said that there has been a rise in defaults in education loans post the global financial crisis as many students found it difficult to get a job.

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.

The objective is to spur banks to lend more to students without concerns over repayment or defaults.

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