Student loans: How to get one and repay it

By Minna Kumar

Student loans are the flavour of the season. With expensive professional education becoming mandatory for people across the country, a student loan seems the most effective way to tide over these expenses. Most students expect to land high salaries at the end of their professional training and are likely to be in a position to repay these loans over a period of time.

How much does it cost?

This is how it works. Take the example of State Bank of India. It has some good scheme for student loans. The loans cover all courses have employment eligibility i.e., course for graduation, post-graduation and professional courses. The expenses that can be paid by these loans are college or hostel fee, examination, laboratory and library charges, all refundable deposits, travel expenses including overseas travel for studies abroad, expenses towards study tours, project work etc.

SBI can provide a maximum loan of Rs 10 lakh for studies within India and Rs 20 lakh for overseas courses. The bank charges 10.50 per cent for loans up to 4 lakh and 11.5 per cent thereafter. It draws out a repayment schedule for one year after completion of the course or six months after securing a job, whichever comes earlier.

Key documents

All students are required to submit mark sheets of last qualifying examination, poof of admission scholarship, schedule of expenses for the specified course, his/her bank account statement for the last six months, an income tax assessment order for the previous two years, a brief statement of assets and liabilities, of the co-borrower, which is usually the parent or guardian and proof of income, if any.

Product pricing

Most banks are vying with each other to aggressively market personal loans. The student loan segment is being viewed as vast untapped potential. Citibank and ICICI Bank are offering equally competitive schemes. Almost every prominent bank in the country has a student loan scheme in some form. What matters the most to an individual is obviously the cost of credit the terms and conditions for education loans. These, like any other loan, vary among banks.

Besides pricing of the product, the most important thing is documentation requirement and the quality of service offered by the bank and the speed at which the loan is approved.

Some banks, such as SBI, also give you a choice between fixed and floating interest rate.

Whereas, private and foreign banks offer loans with a fixed interest rate, some banks charge interest on a daily or monthly reducing balance.

Here the effective interest rate works out to be lower. There are others who charge interest on an annual reducing balance. Individuals can also go for an insurance product in tandem with a personal loan as some banks do product bundling.

Education loans extended by public sector banks at soft rates are a hit with the student community and have been witnessing steady increase ever since the scheme was introduced in 2001. Besides being extended at softer rates, educational loans up to Rs 7.5 lakhs are given to meritorious students without collaterals.

Rate of default

What may hamper the popularity of student loans among banks is the high rate of default. Even so, recently most large commercial banks increased their educational loan portfolio.

Indian Banks’ Association (IBA) has recently formed a working group to address the issue of student loans and the rising rate of default. The group has submitted its findings to the Reserve Bank of India and the main suggestion is to make it mandatory for parents or guardians, of the student borrowing loans, to be co-borrowers thereby making them liable for repayment.

Education loan is an investment in the inter-generational sense and hence pointed policy formulations are urgently required in this sector. The need for these loans in evident, but their viability in future could be improved if the norms governing these loans become stringent. In the meantime, students can the chose the best option from among the many schemes available with both Indian and foreign banks.

Source: http://sify.com