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Surfing for funding?

Here’s how education loans work for business administration courses within and outside the country

education Updated: May 22, 2012 19:03 IST
Harsh Roongta

Finally in this year’s Union budget Pranab da made the much-awaited announcement of setting up of a Credit-Guarantee Fund to help boost banks’ confidence in the education loan sector. Hopefully this will give boost the education loan sector as banks will be able to pass on most of the risks associated with education loans to guarantee fund, thus enabling them to market it as a commercial product, rather than looking at it as a public service product. Currently education loans are looked at as risky products and this is the reason why only the public sector banks are involved in education loans in a big way whereas private sector banks are involved only where either the collateral is very high, or the courses are extremely reputed like the ones offered by the IITs and the IIMs.

Education loans are a priority of governments the world over and India is no exception to this. But the education loan sector could not get the desired boost owing to factors mentioned above. Now with the Indian government taking initiatives, the education loan segment will definitely get a big boost in the time to come.

So how do these education loans work for MBAs in India and overseas? How can you avail these loans? What are the benefits given by the government? To know answers for these and many such questions, read on!

As you are aware, the purpose of education loans is to enhance the earning capacity of the person after the completion of the course, hence banks take this big risk.

Why are education loans risky for banks? Most students who seek education loans do not normally belong to families that have sufficient household incomes to justify the repayment of the education loans. A lot of them will need to start earning before they can afford to even pay for the interest on the education loan and hence need a complete payment holiday during the course period. Also most of the households will probably not have any collateral security on which the bank can fall back on in case the student is unable to complete the course or having completed the course does not get a job that allows him to begin repayment of the loan. Even if the household residence is available as collateral, it is occupied by the family which will not exactly be easy to evict and sell the house to recover the loan amount.

So from the bank’s point of view, an education loan eventually becomes an unsecured loan on which no interest is payable during the course period and repayments begin only after the student completes the course and starts earning enough.

Education loans empower the population, leading to acquisition of better skills, generating higher incomes, thus leading to overall uplift of the people and higher income tax as well. To enable this to happen, in many countries, the country’s government guarantees that you will get a loan irrespective of your financial status if you secure a seat in a recognised course. This is to ensure that no deserving student is denied the chance of educating himself just because he has no access to funds.

In India, we have not had a Guarantee Fund so far, but fortunately Pranab da has announced the creation of this fund which will be a big confidence booster.

Some other initiatives which the government has taken to make it easier for students to get loans are:
* For loans up to Rs. 4 lakh, banks are supposed to lend without any collateral. Even if your parents’ or even siblings’ income is not sufficient to justify the loan, but you have secured admission in recognised course and you have good academic record, getting a loan should not be a problem.
* Another thing that government has done is if one’s household income is less than Rs. 4 lakh, then the interest during the course period is borne by the government completely. So, the student has to just pay the principal amount whereas the interest during the course period is borne by the government. So, that is an excellent scheme provided your household income as certified by the notified local authorities, mentioning that your household income is less than Rs.4 lakh from all sources.

Turning specifically to loans for MBAs, this being the biggest area where people seek loans. In India, if the loan is up to Rs. 4 lakh as mentioned above, no collateral and no guarantee from any income earning person is required. Thus, as long as the course is recognised by the All India Council for Technical Education, getting a loan up to Rs. 4 lakh should not be a problem. However, for loans above Rs. 4 lakh, collateral security and/or guarantee from an earning person is required.

It is only an MBA abroad where this becomes an issue because the degree costs much more there. If an MBA costs Rs. 50 lakh to Rs. 60 lakh, you would get a loan worth up to 80% of that amount. Taking into account not just the tuition fee but also your living expenses, to and fro expenses, purchase of laptops etc, typically you would be made to provide collateral security, without which it may not be possible to get the loan, and that really is a dampener for some students. In any case, most public sector banks restrict maximum education loan amount to anything between Rs. 20 lakh to Rs. 25 lakh.

Hence for such students, we, at Apnapaisa, advise our clients, whose parents have a home loan, and value of their property has gone up substantially, it is a good idea to approach a public sector bank, particularly if the property value has grown dramatically since the time the loan was taken. The public sector bank which might not just take over the home loan but based on the same property, you can get the education loan. This way the same collateral can be used for two kinds of loans.

If you have access to some collateral security, you should also approach Credila — an HDFC Ltd company which, though more expensive than the public-sector-undertaking (PSU) banks, is more flexible and may find a creative solution to your education loan needs. Unfortunately, they will not provide loans without collateral security.

This way students who wish to take up MBA courses overseas will be able to fulfil their dreams.

The author is CEO, Apnapaisa.com, a price and features comparison engine for loans and investments.

He can be reached at www.facebook.com/apnapaisa