How To Be Prudent To Avoid Education Loan From Becoming A Debt Trap

Education Loan is a great blessing to the deserving and aspiring students, who otherwise would have been unable to pursue higher studies for want of finance. However, education loan can become a double edged sword and can hurt both the lender and borrower unless both are prudent. This article gives useful guidance to the students who wish to avail education loan, on how to apply, avail ,utilise and repay the education loan prudently. The article is also useful for existing education loan borrowers also.

What is the objective of education loan

The aim and objective of education loan is to "provide financial support to deserving meritorious students to pursue higher education," who are unable to do so for want of sufficient financial capability. The real objective of the education loan concept by banks in India is that no deserving student should be denied higher studies just for reason of lack of finance. Hence the terms and conditions of education loan have been made light. Loans unto Rupees four lakhs do not need any security except co-obligation of the parents.

What is the present scenario

The relatively easy availability of education loan has opened floodgates of hopes for thousands of students and parents, who otherwise would have foregone the higher studies by resigning to fate. This became all the more helpful to poor and lower middle class students in villages and smaller towns. After reviews and feedback the procedure and terms were made more beneficial. A recent judgment of Chennai High Court emphasises that education loan cannot be denied to students getting admission under management quota also. So there will be a heavy demand for education loan in the coming years, as there are hundreds of self-financing educational institutions with more management quota seats.
However from the various reports in the media and the experiences of bankers and borrower students and parents, and from the number of cases in courts and other fora all is not well in education loan scene.

What are the problems of borrowers

Most common grievance of students and parents voice is that banks are not willing to sanction education loan and make delay tactics. While there are decided cases in favour of students in this regard, students' contention is not right in many cases. Banks have real reasons to deny loans. Repayable amount being far more than loan availed, repayment installments higher, repayment period short, salary not sufficient to service loan repayment etc are some of the other grievances heard. There are some disheartening (though fortunately rare) reports of students committing suicide due to loan denial or recovery steps on defaulted loan. This gives concern.

What is banker's dilemma

The problems with regard to education loan are not only for the students and parents. Banks are also victims. The serious problem banks face is the mounting default in education loans. Banks express concern that, percent wise their NPA s is quite considerable in the education loan segment. As there are no physical assets created out of education loan banks find recovery very difficult. Another problem banks express is that many borrowers do not inform banks their latest whereabouts and leave their original residence after completing studies either for job or further studies. Banks also feel that many borrowers feel that education loan need not be repaid as it is a sort of grant disbursed and govt may write off same. Bank overstressed during the start of academic year with all admissions open and demand for education loan becoming huge. Naturally they cannot satisfy all and there may be some left with desperation.

What can be a reasonable way out

The one single solution for solving major problems of both parties above-students and banks- is to be prudent right from the stage of applying for education loan.

What are the prudent steps to follow in education loan

Choice and selecting the bank for education loan
While applying for education loan, students and parents should be sure about the bank they approach. Their first choice should be the bank where they have accounts or otherwise having connections so that the bank has a fair amount of familiarity and knowledge about the applicant. Naturally a bank will prefer its own customers first. They should choose a bank in their area of residence. Given all points same they may choose a bank which has its branch near the educational institution also.

Calculation of education loan amount needed
Though banks have their own methods on arriving at the permissible loan amount, it is the responsibility of the applicant to ask for the right amount of loan. The amount of loan requested should be sufficient to complete the full course with all its legitimate expenses Applicants can get the details of the expenses allowed and excluded, from the banks. Fearing repayment, many parents seek only lesser amounts, thinking that they can find another source later. This
is not right and prudent and banks will have their suspicion on the application. Applicants should consider all the needed expenses for completing them course, and if they have their own sure source, they may mention same and seek loan for the balance amount. But both the expenses and own source should be established with proper documents. The college/institution's fee structure list, brochure can establish the cost expenses. Fixed deposit receipts with bank NSC maturing shortly etc can establish own source. It is not correct to ask for exaggerated amounts, as naturally banks will not sanction it. It is also not advisable to ask for insufficient funds for fear of interest and repayment, because that may land in very difficult financial situations if things don't work as thought.

how to avail the initial stage amount
If all works well and loan is ready to be released before the last date of remitting to the college, fine. Applicant can get a Demand draft or the mode which the colleges demanded by showing the demand notice or brochure and admission letter from the college. The amount need not be availed very early, as interest will start accumulating from day one. One should see that they take it only at the proper time to submit to the institution in time.
But many times the proverbial gap between the cup and lip. There will be genuine delays in sanctioning and releasing the loans. Some institutions need fees and other amounts to be remitted before they can give a letter regarding admission. Due to these situations, there is a provision to get the first year's fees reimbursed. Hence the applicants should appraise the bank that they are going about the admission and arranging for remittance of the initially needed amount and seek for reimbursement. (This is one area misused by some parents as they do not approach and appraise the banks at first and apply later finding that education loan is an easy area to get finance which they can divert for their other business activities)

Later stages of loan availment
The later stages fees etc are not allowed to be reimbursed. Hence when the demand for the same is received from college it should be submitted to the bank seeking the permitted amount. Any amount not allowed by bank in education loan but needed to be paid by the student should be provided by the student/parent to the bank. Applicants should see that they apply well in time to avoid delay, but avail just when needed only to save interest as in first stage. The fee receipts / copies should be submitted to the bank.

service of interest then and there
Interest like disease, goes increasing if not halted at right time, and becomes unmanageable at last stage. At initial stages when the loan availed is very less, the interest is also very less. It is seen that it is affordable to service interest then and there. This eases final repayment, and also leaves a better credit opinion with the bank. The regular rapport and contact with the lending bank can help in many ways.In some banks there are some provisions for interest rebates if interest is serviced regularly.

after completing the course
It is imperative to inform the bank about completion of course. Bank should be intimated abut the next course – employment or higher studies and update the address and other details. If any amount is received from the college like caution deposit etc, this amount can be remitted to the loan account unless it is needed for further studies. This will save some liability. At this stage a strategy and plan should be worked out with the bank in regard to repayment a the job / income prospects are more clear now.

On getting job / income
Having got a job and income the education loan repayment should be promptly started as per the arranged plan. If the income is more than expected and can spare more to repay that should be done. In case the income less than planned, it may be convinced to the bank, and a more comfortable plan worked out. The repayment should be regular.

If possible one can now try for another type of loan with lesser interest and use the same to liquidate the education loan.

In Conclusion

While education loan is a blessing for the financially weak family students to realize their dream of higher studies,
the students should feel it their responsibility to use the same prudently and justifiably and for the intended purpose. They should repay the loan promptly. This will not only save them from debt trap and recovery discomforts, but will spare scarce resources to benefit another similar deserving student.

If the preceding suggestions can be followed systematically, education loan will not become burdenous liability and will not lead to a trap.

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