Using debt to study abroad

Study abroad is expensive, yet more and more Indian students are determined to get the cutting edge which this apparently brings. This year,...

Study abroad is expensive, yet more and more Indian students are determined to get the cutting edge which this apparently brings. This year, roughly 75,000 Indian students will go to the US, 20,000 to Australia, 8,000 to the UK, 4,000 to New Zealand and 3,000 to Canada, trying to shine their future by getting a 8216;phoren8217; degree. In a situation where graduate courses are also getting popular and the number of scholarships largely stagnant, a larger number of students are opting for educational loans from banks on easy terms. Last year, 9,552 Indian students took such loans from nationalized banks, up from 2,881 the previous year. We seem to be going the way of the US, where 64 per cent of students are in debt to the tune of 17,000 each when they graduate. Even wealthy American parents want their children to 8216;earn8217; their degrees, to work their way through college. Out there, the loans are almost all easy-term, low interest, tax-deductible and reschedulable.

Educational loans are new to India, having been around for only half-a-decade. It is mostly the staid old nationalised banks which are offering educational loans for studies abroad 8211; the private and foreign banks are not giving it much priority. Some private banks are playing safe by giving loans to only students with admission to prestigious domestic institutions. For example, Citibank has a tie-up with NIIT and UTI Bank with Amity. ICICI bank8217;s customer relations officer Swapniel Salvi says that parents are welcome to take a personal loan. But the rate of interest is much higher for these and repayment starts immediately, unlike in the case of educational loans, which the student herself can repay when she starts working.

With this 8216;repayment holiday8217; as its prime advantage, the educational loan market has taken off on an upward trajectory 8211; it touched Rs 119.25 crore in 2004-05 compared to Rs 38.72 crore in 2003-04. When banks started giving such loans in 1999, parents were required to give collateral, a clause which played spoilsport. The Indian Banks Association subsequently revised the norms in June 2000, asking banks not to demand security for loans upto Rs 4 lakh. Beyond this amount, collateral such as share certificates, government bonds, IVP, KVP, and mortgage of property are required.

Loans of Rs 15,000 to Rs 50,000 at 12 per cent interest are also available for certain professional courses in India, but these are for families whose income is less than Rs 1 lakh per annum. Another sweetener for the parents who take the loan for their children is a deduction for eight years under Section 80E for repayment of the loan upto an amount of Rs 40,000 including both principal and interest per year.

Rates of interest and repayment terms

How do you, a student with no credit history, know if you are eligible for a loan?

8226; First of all, the course you want to do should have obvious employment prospects. It can be a graduate or PG course. That means the ever-popular Eng Lit course is out: it has to be more directly linked to the job market
8226; Your parents, or co-borrowers, must have filed their income-tax returns for the last two years, or be able to produce their salary slips/Form 16
8226; Parents8217; bank statement for the last year or six months must be available
8226; You must already have got admission to a course 8211; graduate or PG 8211; before you approach a bank

Every bank has different limits, rates of interest usually 10-12 per cent and repayment terms. The State Bank of India SBI gives loans upto Rs 10 lakh for studies in India, and upto Rs 20 lakh for studies abroad. At SBI, the amount can even go upto Rs 50 lakh for those who take the Edu Shield life insurance policy. In case of death of either the student or the parent, the insurance will pay the remaining loan. SBI has no processing fee but a deposit of Rs 5,000 has to be made for loans for studies abroad, which will be adjusted in the margin money. Repayment has to commence one year after completion of course, or six months after securing a job, whichever is earlier.

At Allahabad Bank, the terms are similar, but the upper limit is Rs 7.5 lakh for local studies, and Rs 15 lakh to go abroad. The rate of interest is equal to the prime lending rate PLR, the rate at which banks lend to the most creditworthy companies for loans upto Rs 4 lakh and almost 2 per cent below PLR for those above. The repayment moratarium is the same as SBIs, but the loan must be repaid in maximum 84 equated monthly installments EMIs, that is in seven years.

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Looking ahead, it will only get easier for young adults to take future in their own hands. Wipro8217;s Chairman Azim Premji is lobbying hard to get the government to subsidise the banks so that they can provide student loans at only 5 per cent more than the savings bank rate. The election manifesto of the Congress in 2004 had even promised an Education Development Finance Company along the lines of HDFC. Till the market matures in India, you still have the option of getting your parents to take a personal loan, go abroad, and get a cheaper loan from a bank in your host country. Of course, you may have to ask a relative there, with a good credit history, to be the co-borrower.