In India, study loans are being provided by most nationalised banks, along with some private banks. These banks generally provide loans (or have provision to provide loans) for higher education in India (which includes management, medical, engineering studies, etc. and also for higher education abroad. Often the maximum limit for such loans is Rs 7.5 lakh for domestic studies and Rs 15 lakh for studies abroad. The interest rates vary from 10% to 14% p.a, with an added premium of around 1% p.a. on loans above Rs 4 lakh.
One of the best features of these loans is the repayment requirement. Most nationalised banks offer such loans for a maximum of seven years, where the repayment starts one year after the end of the course (or six months after getting a job, whichever is earlier). This, no doubt, provides students some flexibility in repayment.
Other important features include no margin and security requirements (up to a certain amount), lack of penalty for pre-payment and also no compulsion to pay the interest amount during the moratorium period. These three aspects are important for students, keeping in mind the basic premise of such loans. Which is to fund higher education of needy and deserving candidates.
But, are Indian banks really accessible to needy and deserving candidates, especially with the plethora of rules and guidelines Generally, the first stint of a student with a banks loan department is quite a nightmare, as unless his parents have an existing relationship with the branch along with a good track record, or they find out an effective recommendation within the bank, the time duration between initial interaction to the final authorisation can go up to two-three weeks. Also, banks refuse to follow the guidelines regarding no margin & security requirement for smaller loans. Every education loan requires the father/ mother of the student to be the co-borrower and bring in at least one more guarantor. This is apart from the collateral security for loans as low as Rs 2-3 lakh.
However, the recent focus of many bank managements on education loans has made life easier for students. SBI has a scholars loan facility for those securing admissions in a number of management and engineering colleges. The scheme has three focus pointslower interest rates, least documentation and speedy sanctioning.
This scheme also recognises the cost of the exchange programme (ties with foreign colleges), gaining momentum in most business schools, thus enabling students to get international exposure.
There is another side to education loans, which is the tax benefits under Section 80E of the Income Tax Act, 1961. This deduction of up to Rs 40,000 p.a for a maximum of eight years (starting from the year when repayment begins), has been one of the biggest boons for students. This deduction has been in perfect sync with the prevalent terms of education loans and has induced more and more students to avail of this facility.
The Finance Act, 2005, has brought in some changes in this deduction which, on the face, look quite lucrative. However, when one goes through the fine print, the real picture is far from heartening. The amendment has removed the maximum limit of Rs 40,000 p.a. Thus, one can claim the total amount paid during the year. But then, theres a catchthe total amount, which earlier consisted of principal and interest both, has been restricted to only interest.
In the light of these arguments, it only seems fair that the government should try and take one step forward towards making higher education more accessible, rather than moving backwards.
The writer, a chartered accountant, is a first-year MBA student at MDI, Gurgaon