Borrow to beat resource handicap

Education plays a pivotal role in empowering any country. Therefore, both the Union and the state governments have formulated a number of policies to meet this basic need.
They are endeavouring to provide universal primary education but higher education is veering slowly and progressively towards the private sector. As a result, the governments’ budgetary support to higher education is receding and the cost is rising.

The percentage of population (in the eligible age group) pursuing higher education in India is only about 10, as against 85 to 100 in many developed nations.  One of the reasons for this is economic backwardness. The existence of at least 25 per cent of the population below the poverty line is a reflection of the problem of poverty. The number living below the poverty line today is more than the country's population at the time of Independence. As a result, numerous merit students keen to pursue higher education cannot do so for want of finance.

This situation underlines the need for institutional funding in this area with appropriate public and private initiatives.  In a meeting with the chief executives of the public sector banks in June 2000, the Union finance minister had highlighted the banks’ role in helping the poor but meritorious students to pursue higher education.  The Indian Banks' Association (IBA) then constituted a study group under the chairmanship of R J Kamath, Chairman and Managing Director of Central Bank, to study the issue. On the basis of the group’s recommendations, IBA prepared a comprehensive model educational loan scheme for adoption by all banks.  The Finance ministry accepted the IBA’S model scheme with minor modification. The scheme was announced in the Union Budget for 2001-02. It aims at providing financial support from the banks to deserving meritorious students for pursuing higher education in India and abroad.

Salient features

The Important features of the scheme, as communicated by the Reserve Bank of India (RBI) to all the scheduled commercial banks in April 2001 are:

-Grant of loans upto Rs 7.5 lakh for studies in India and upto Rs15 lakh for studies abroad,

-Loans upto Rs 4 lakh may be advanced at an interest rate not exceeding the prime lending rate (PLR) of the bank. For loans above Rs 4 lakh, the interest rate may be PLR + 1 per cent. PLR is the interest rate that the banks charge on short-term loans to their largest, more secure and credit-worthy customers. This rate is used as a guide for determining the interest rates for other borrowers. The government may reduce the interest rate on educational loans even below PLR. The banks currently charge interest at the rate of 10 - 12 per cent on the educational loans. The Union Human Resource Development ministry is keen that the interest on education loans should be as low as 4 per cent.  

Simple interest is debited quarterly / half-yearly during the repayment holiday / moratorium period, which is equal to the course period + 1 year or 6 months after getting a job, whichever is earlier. The Union government is also keen that the repayment period should be extended to six- seven years. The accrued interest during the repayment holiday period is added to the principal and repayment in equated monthly installments (EMI) fixed. While 1 to 2 per cent interest concession may be given to loanees if the interest is serviced during the study period, penal interest at 2 per cent could be charged for overdue amount and overdue period for loans above Rs 2 lakh.

nNo margin may be insisted upon for loans upto Rs 4 lakh.  However, for loans of higher amounts, the margin requirement may be 5 per cent for inland studies and 15 per cent for studies abroad. Margin may be brought-in on year-to-year basis as and when disbursements are made on a pro-rata basis,

-For loans above Rs 4 lakh, collateral security of suitable value or co-obligation of parents / guardians / third party along with the assignment of future income of the student for payment of installments may be obtained. The security can be in the form of land / building / government securities / Public sector bonds / Units of UTI, NSCs, KVPs, LIC policy, gold, shares / debentures, bank deposit in the name of student, parent / guardian or any other third party with suitable margin,

-The condition of minimum qualifying marks in the last examination may be dropped,

- No processing / upfront charges may be collected on educational loans, and

-The loan amount is to be repaid in five-seven years after commencement of repayment.
Courses eligible for loans

Some of the courses covered by the loan schemes are:

-Studies in India: (a) School education including +2 stage, (b) Graduation courses like BA, B Com, B Sc, etc, (c) post-graduation courses like Masters and PhD, (d) Professional courses such as engineering, medical, agriculture, veterinary science, law, dental, management, computer, etc, (e) Computer certificate courses of reputed institutes accredited by the Department of Electronics or institutes affiliated to any recognised university, (f) Courses like ICWA, CA, CFA, etc, (g) Courses offered by IIMs, IITs, IISc, XLRI, NIFT, etc, (g) Courses offered in India by reputed foreign universities, (h) Evening courses of approved institutes, (i) Other courses leading to diploma / degree offered by colleges / universities approved by UGC / governments / AICTE / AIBMS / ICMR, etc, and (j) Courses offered by National Institutes and other reputed private institutions.
nStudies Abroad: (a) Graduation - For job-oriented professional/technical courses offered by reputed universities, (b) Post-graduation - MCA, MBA, MS, etc, and (c) Courses conducted by CIMA (London), CPA in the US, etc.

Eligibility

The students who fulfill the following conditions can seek bank loans for education.   

-The student should be an Indian National,  

-He / she should have secured admission to a course through an entrance test / selection process, or

-Secured admission to foreign university / institutions.

Expenses considered for loan

Subject to the repaying capacity of the parents / students with margin, the students can avail themselves of loans from banks for the payment of (a) Tuition / hostel fee, (b) Examination / Library / Laboratory fee, (c) Purchase of books / equipment / instruments / uniforms, (d) Caution deposit / building fund / refundable deposit supported by institution bills / receipts, (e) Travel expenses / passage money for studies abroad, (f) Purchase of computers essential for completion of the course, (g) Any other expense required to complete the course - like study tours, project work, thesis, etc.
 
Sanction / disbursement of loan

- Loan applications have to be disposed of within a period of 15 days to 1 month,
- No application for educational loan should be rejected without the concurrence of the next higher authority,
- The loan to be disbursed in stages as per the requirement / demand directly to the institutions / vendors of books / equipment / instruments to the extent possible, and
- Banks can issue capability certificates to students going abroad for higher studies. For this, financial and other supporting documents may be obtained from the applicant, if required. Some foreign universities require the students to submit a certificate from their bankers about the sponsors solvency / financial capability, with a view to ensuring that the sponsors are capable of meeting the expenses till the completion of studies.

Tax benefit

Interest paid on educational loan is eligible for tax relief under section 80E.

Many banks offer education loan schemes. The banks’ websites provide all the details one might need. Since banks revise the rules, regulations, eligibility conditions, repayment moeds and interest rates periodically, students and parents should read the terms and conditions thoroughly before the submission of applications.

(The author is Chairman and Dean, Department of Studies in Commerce, Kuvempu University, Shimoga)