Personal Finance: Loan Ranger

PERSONAL FINANCE: EDUCATION
Loan Ranger

Be it an IIM or a US university, education is expensive business. Here's all you ever wanted to know about educational loans.

By Vinod Mahanta

Here are two facts of life. One, a foreign degree is aspirational. And two, it's bloody expensive. That probably explains the saying: If you want to be No. 1, you need lots of No. 2.

Not really. Even if you've slaved all your life to get your offspring into a US college-or an IIM-do you really want to lock up a hefty chunk of your life-earnings? I'm not being blasphemous, just urging you to be smart. Take an educational loan. It's as simple as walking into a bank, and asking the branch manager for a form.

Educational loans have been around for some time now-Canara Bank's Vidyasagar Scheme was the first well-known programme to be offered to the hopefuls-but most kids I know go abroad on scholarships. It's obvious that the stratospheric demand for a foreign degree has taken charge. The cost of these degrees has shot up too. Including tuition fees, boarding and lodging, a year studying abroad could cost you, as provider, $40,000. That's, like, Rs 17 lakh. Worse, the rupee continues to slide against the dollar. Back at home, the fees at the IIMs and other professional schools can make a grown man cry.

No wonder most banks are reporting a sudden increase in disbursements towards student loans. While no figures were readily available, rough estimates point towards a 50 to 100 per cent rise in disbursements from the previous year. Avers C.P. Swarankar, 52, gm (Finance), Punjab National Bank (PNB): ''In the last fiscal, we have just doubled the amount lent for educational purposes.'' Chimes in M.A. Kamath, 59, gm (Priority Credit), Canara Bank: ''The importance we give to educational loans can be gauged from the fact that we treat it as a priority sector.''

In fact, some of the best, and most popular, educational schemes have actually come from the public sector banks. The usually-aggressive private and foreign banks have generally shied away from this segment. However, that is changing. ICICI Bank has just started an educational loan scheme. As has Citibank. And, ANZ Grindlays and ABN Amro give personal loans to executives of blue-chip companies for educational purposes.

Eligibility Criteria

They are more or less the same for most banks. The course has to be a recognised one. Some banks also give preference to job-oriented programmes like computer courses. Banks usually fund higher studies in select areas: management, engineering, medicine, agricultural studies, interior decoration, computer science, and chartered accountancy and law.

A consistent academic record helps. Most of the banks stipulate a first-class degree. The PNB, Central Bank, and Bank Of Baroda (bob) also have an age clause, which requires an applicant to be in the 16-30 age group. Similarly, Allahabad Bank offers loan only to students of the IITs & IIMs. Get the documentation in order. For a loan to study abroad, a passport with a visa is a must.

Costs, Hidden and Apparent

The interest rates charged by banks range between 12 and 15 per cent (See Educational loans @ the end of the tunnel). Shop around and watch out for the hidden costs. They are the processing charges and the margin money to be paid to the bank. The margin money varies from 10 to 25 per cent. Some banks have a differential margin money rate which increases with an increasing loan amount.

Stresses PNB's Swarankar: ''Margin money is low or nil in some of the banks, because it is an investment in human assets. No tangible asset is created but the capital goes in improving human asset.'' The loan processing charge also varies. Some banks charge on a per lakh basis, some charge a flat rate, some charge a small percentage of the amount itself. ''It's not a business proposition,'' avers Alva.

The Bottomline

What do the banks offer in return? Most loans cover tuition fees, security deposits, and the cost of study material. Boarding charges, usually a big chunk of expenses of students going abroad, are written in. In general, a student seeking a loan has to provide a break-up of his expenses. Says P.K. Alva, 57, gm (Credit), Corporation Bank: ''We remit the fees directly to the institutes, but for things like stationery we reimburse the student on production of the bill.'' Some banks also pay for one-way air-tickets.

The amount of loan is also a major issue. ''The amount required for higher studies has increased considerably. Some banks like ours are raising the limits to cover the increased expenses,'' avers Alva. Banks that give loans of Rs 10 lakh and above: Oriental Bank Of Commerce, Bank of Baroda, SBI, Canara Bank, and PNB. Most banks have similar collateral norms. Usually, it includes co-obligation of guardians equal to the loan amount. Or even 150 per cent of the amount.

Time to Repay

The interest is serviced by the parent till the student can, hopefully, start repaying. The repayment begins six months to a year after the course is complete, or till placement, whichever is earlier. This period varies between 12 to 131 months. Says Swarankar: ''After completing studies, the first two years are formative ones. So, the banks have a long repayment period.'' Banks falling in this category: PNB, Allahabad Bank, SBI, Canara Bank, Syndicate Bank, Vijaya Bank, Federal Bank.

Generally, an EMI is fixed or the amount is repaid on a reducing balance scheme. Your route depends upon the goals. Keep an eye open for tax benefits. Section 80E allows a deduction of up to Rs 25,000 if parents take a loan for their wards' education. Finally, for all the financial burden, there's the bright side: if the kid's smart, he'll repay you many times over. Inshaallah!

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