Education Loans..A Debt trap with a Death trap...

Government and the Bankers should reconsider to reduce the overwhelming interest burden placed on Education Loans. This burden can become a debt trap, leading them to choose death. Is it now the role of Education loans after Agriculture loans to become a death trap. The Bankers are now critical and pessimistic about these loans and moving with legal proceedings indiscriminately.

The frequent rate hike by Reserve Bank of India to control inflation adds further oil to the unrelenting fire of inflation. This adds unimaginable woes to borrowers. The better option could have been to increase CRR and SLR percentage to control money supply and inflation.

 

The importance of education is emphasized through these words of US President Barack Obama, when he said, ‘In an economy where knowledge is the most valuable commodity a country have to offer, the best jobs will go to the best educated - whether they live in the United States or India or China’. He makes a very important observation, pertaining to the need of education in holding a good job and flourishing in a successful career.

The importance of education is most evident in developing countries. There, it is a means to alleviate poverty and engineer social change. Education has a fundamental role to play in personal and social development. While it isn’t a magic pill to solving the problems of the world, it is a ladder that can be used to climb out of poverty and ignorance. The children and youth of our times, who will take over from today’s adults, need to be equipped with knowledge to usher in a better future.

In line with the goal of nation building, India has been committed to providing free and compulsory education to all children. Towards this end, Indian Parliament has enacted a legislation making free and compulsory education a Right of every child in the age group 6 to 14. “For every one of our people to benefit from new employment opportunities being created across the economy, we must ensure that every Indian is educated and skilled. No nation can progress unless its people are educated.”

Educational loan for all the eligible candidates

Higher education is only a dream for even the brilliant in the past due to the economic crisis. Banks were not ready to give loans for education. The rules were very strict. But today the whole situation was changed. Loans are available for those eligible candidates whenever necessary. Loans are available at present for all the talented students to acquire maximum education.

The students who are studying in India will get maximum 10 lakh rupees and for the study in foreign countries the student will get maximum 20 lakh rupees as educational loan.  Only precondition is that the educational institutions should have the recognition of UGC, INC or AICT.

Many institutions of different states follow different fee structure. The nursing institutions are creating havoc in the scene. In such cases a commission for the mediators is also charged. Rather than the aim of acquiring knowledge, the availability of loan induces a majority for taking educational loans. These tendencies repulse banks from sanctioning loans. Because of this some eligible candidates have to face some hurdles in getting loans. The advantages of Educational loans to our society are many. So a sensible approach should be given to educational loans.

The loan re-payment should begin after one year of the course duration or after six months of the employment. This period is known as moratorium period. Only simple interest is charged during this term. After that term, compound interest is applied. 1% special discount in the interest rate will be given to those who repay the interest in the moratorium period.

Rebate for educational loans

The government had put forward a special plan to refund interest in order to reduce the burden of the parents. According to the plan mentioned in the Central government budget of 2009-2010 the government will take care of interest for the educational loan during the academic years. These merits are given to those students studying in India, if the annual income of the parent is below 4.5 lakh. Government will pay the interest till repayment start. The loans sanctioned from the financial year 2009-2010 are eligible for this rebate.

Despite these advantages, the rate of interest applicable to Education loans spoiled the glitter. Take a look at the table below to know more about the interest rates of the education loans:

Amount (INR)           % of Interest per annum

Up to 4 lakhs               14 as per current market rate

(4 – 7.50) lakhs           15.5 as per current market rate 

More than 7.50 lakhs   14.5 as per current market rate

(The interest for Housing and Car loans is 11% up to a loan of Rs.30 lakhs.)

Take look at the EMI have to be paid after the moratorium period of 60months (48+12).On completion of this 60 months the loan amount of Rs.4 lakhs will become Rs. 6,77,000/- after addition of simple interest applied at 14%. The EMI for this amount of Rs.677000/- will be Rs.12700/- for 84 months. The interest subsidy announced by the government is attractive for borrowers from the financial year 2009. But numbers of recipients are few and this scheme remains a mirage for the majority. Even the bankers find it difficult to track the fate of the subsidy applications.

An engineering graduate who can get a campus placement for a salary package of Rs.35000/- and above only can repay the loan with the above EMI. It is not common that a professional graduate getting this salary as their starting salary. Non payment of EMI will make them ineligible for any other loans due to CIBIL rating. The mounting NPA of the banks also will be a matter of concern and has to be contained. 

The Reserve Bank of India and the Government should make changes in the overwhelming interest rate and reduce to the current Repo rate of 8.5%, considering the importance of education in a developing economy. Otherwise the future of this younger generation and the banks will be jeopardized.