Education loans set to become more attractive!

May 10th, 2010 (Copy From http://www.bankbazaar.com/guide/education-loans-set-to-become-more-attractive/18487/ )

Typically interest rate on the education loan starts accumulating as soon as the course is over. Since interest during the moratorium period will be paid by the government, EMI for the borrower is set to fall. This will reduce pressure on his/her cash flows.

This is a proposal which has been submitted to the Planning Commission and has been discussed with them too. The Planning Commission is currently looking into the proposal of setting up a National Education Finance Corporation (NEFC) to refinance banks. Based on the feedback received, the ministry will prepare a formal note which will be submitted to the Cabinet for approval.

The Ministry of Human resource development (HRD) headed by Mr. Kapil Sibal, has drafted a proposal on educational loans, which entails changes that will increase the accessibility of these loans- the objective being an equitable distribution.

The proposed changes include:

• Reduction in the rate of interest: The Ministry is planning to subsidize the interest rates on educational loans and intends to bring in down to as low as 4%. For the same, the Ministry is working on a refinance scheme. This would involve, setting up of a Special Purpose Vehicle (SPV) to refinance banks for giving educational loans at a rate of interest below the PLR. National Education Finance Corporate (NEFC) will have to be set up to refinance the banks.

Impact: Banks have been witnessing defaults and non-payments on educational loans. This may change. Banks are set benefit on two counts- defaults should reduce because of low rate of interest charged to the borrower and even in case of defaults; banks will be able to cut their losses by virtue of subsidy provided by the government.

• Set criteria for charging interest rates: It is intended that the rate of interest charged will be based on parent’s income.

• Parents with income less than Rs 4.5 lakhs p.a. will be charged 4%

• Parents with income more than Rs 4.5 lakhs p.a. and requiring a loan of less than Rs 12 lakhs will get it at 7%

• For loan amounts above Rs 12 lakhs, interest will be charged at 9%

Impact: The highest rate of interest to be charged under the proposed structure i.e. 9% is lower than the lowest rate currently charged by banks, which is in the range of 10%-12% in most instances. This will certainly prove to be beneficial to students across the board.

• Repayment period: The ministry intends to increase the loan repayment period to 6-12 years from the current 5-7 years.

Impact: This will reduce the pressure on the borrower by giving him/her greater amount of time for re-payment.

• No interest during moratorium period: The interest cost for the moratorium period will be paid by the government - So if the loan is for a period of 7 years, the interest for the first two years (study period) and one year moratorium (holiday period to find a job) will be paid by the government and for the balance 5 years, interest and principal will be paid by the borrower.

Impact: Typically interest rate on the education loan starts accumulating as soon as the course is over. Since interest during the moratorium period will be paid by the government, EMI for the borrower is set to fall. This will reduce pressure on his/her cash flows.

This is a proposal which has been submitted to the Planning Commission and has been discussed with them too. The Planning Commission is currently looking into the proposal of setting up a National Education Finance Corporation (NEFC) to refinance banks. Based on the feedback received, the ministry will prepare a formal note which will be submitted to the Cabinet for approval.

If this proposal is approved by the Cabinet, educational loans will certainly be accessible to more number of students. ‘Financial issues’ will hopefully not deprive a student from pursuing higher education.

Loan Guarantee Authority for Education Loans

Date:10/05/2010 URL: http://www.thehindu.com/2010/05/10/stories/2010051060631100.htm ‘Set up loan guarantee authority for education loans' Aarti Dhar Montek Singh Ahluwalia NEW DELHI: The Planning Commission has suggested that the Human Resource Development Ministry examine the option of setting up a loan guarantee authority as a separate division within the purview of the proposed National Education Finance Corporation (NEFC). The proposed NEFC aims at refinancing student education loans and institutional loans at concessional rates with longer repayment, which will help expansion and new investments in the higher education sector, particularly universities. While putting the NEFC on a “fast track”, Planning Commission Deputy Chairman Montek Singh Ahluwalia reportedly told the Ministry to also look into the possibility of creating an authority that would stand guarantee for education loans to students or institutions who borrow money for investment in the higher education sector, instead of only refinancing. Mr. Ahluwalia is said to have suggested to the Ministry that both the options of refinancing and standing guarantee could be brought under the purview of the NEFC. The proposed NEFC would have two divisions, one as a loan guarantee authority and the other to deal with infrastructure loans. To be entrusted with the task of managing the corpus fund for educational institutions, the NEFC would refinance the institutional loans available to colleges, institutions in higher educations for capacity expansion and new investment, and universities for expansion at the prime lending rate (PLR) of banks. It will also provide concessional funding for philanthropic institutions at below-PLR rates. The repayment period will be 15-20 years, with a five year moratorium on principal repayment. If the NEFC stands as a guarantor, it will have to pay only for defaulters, who would be few. The Ministry, open to the new suggestion, is working out mechanisms to cut down on defaulters before approving the loans. The refinancing of loans for investment is also expected to curb capitation fees, since, at present, investment for infrastructure has to be borrowed at commercial rates where the interest is high and the repayment period short. To avoid this, institutions often borrow money from the market, and in order to repay it quickly, charge capitation fees from students. Once the loan is repaid, the capitation fee turns into profit. With the availability of soft loans, this is expected to come to an end. The NEFC will refinance to the bank at a lower rate the sanctioned loan that it releases to the student or an institution. The bank makes its margin from the difference in interest rates, while the NEFC will use the educational cess released by the government, which is free of cost and also borrows from the market, so that the average cost of funds advanced as loans is lower than the rate at which it lends to banks. This differential rate will be the NEFC's margin or profit. © Copyright 2000 - 2009 The Hindu

Poor Students may get Education Loan at 4 %

'Poor' students may get education loan at 4 per cent

New Delhi, May 14 (PTI):

Government is planning to provide education loans at four per cent interest rate to help students from weaker sections of society to pursue higher studies.

Discussions are on between the HRD Ministry and the Planning Commission on this innovative concept, which is seen as a significant initiative of the UPA government. "It (education loan at four per cent proposal) is at a preliminary stage. We have discussed this idea with the Planning Commission and it is supportive," HRD Minister Kapil Sibal told PTI. This loan will be provided by banks while a proposed funding corporation for higher education will re-finance the banks to help them compensate the loss. The mandate and functioning of the proposed National Higher Education Finance Corporation (NHEFC) are now being worked out. "I hope it will be crystallised soon," Sibal said. The detailed modalities are being worked out for the scheme, including the weaker section criteria. The scheme will have another component of providing loans to students at the rate of seven per cent, subject to a ceiling. There will be a cap on loan amount in this category. There may another provision of extending loans at nine per cent without a cap on the amount. According to sources, the NHEFC, which will also provide low-interest loans to higher educational institutions for capacity building through commercial banks. The HRD Ministry has already prepared a concept note on creation of NHEFC. As per the HRD Ministry's plan, the proposed NHEFC will be an institutional mechanism to address the investment needs in higher education sector. The proposed corporation will nurture philanthropic tradition in education by providing loans at concessional rates on interest to such agencies for establishment of higher and vocational institutions in educationally backward areas. It will be a NABARD like institution in higher education and will raise debt by issue or sale of bonds for augmenting resource from the market and will finance creation of universities. The proposed scheme will be in addition to the existing interest subsidy on educational loan scheme. Under the existing scheme, students, whose family income is less than Rs 4.5 lakh per annum, are able to get loans at a concessional rate. Normally the education loan is about one per cent less than the Prime Lending Rate (PLR) of the banks. The PLR of the national banks is around 11-12 per cent on loans.

Education Loan Information

Acouple of good sources of information about Education Loan Schemes in India are available at

http://action2020eltf.blogspot.com/

http://www.apnaloan.com/education-loan-india/

Check out these sites.

How to Apply for Education Loan and Get it!

The public sector banks in India have a very good education loan scheme for students pursuing higher education in general and professional courses in particular. The banks have published on their websites the rules and requirements for these loans and also provide facilities to apply on-line and also to download the application form. However many students do not take advantage of this on-line facility and directly approach the bank managers without accessing and/or understanding this online information. Many times the bank managers flatly deny the loan request or impose extra requirements than necessary. Following step by step guide will help students to access this information and exercise their right to get the loan.

• Before CET Counseling

1. Make a list of Public Sector Banks nearest to your family home and rank them starting with the nearest.

2. Go onto their Education Loan webpage on the internet and print information about the bank’s education loan scheme, study it and understand the eligibility requirements, eligible expenses and conditions for various levels of loan amount. Check whether the bank has online application facility. List the phone numbers and names of the bank manager and the assistant division manager.

3. Decide on amount of loan you need to complete your education. For example, for 4 years of engineering, with or without hostel, Rs. 4 lakhs or less is currently sufficient for most of the colleges in Karnataka. Understand the bank conditions for the loan amount you need. Conditions to look for are collateral security, third party guarantee, margin, interest rates and repayment period.

4. Download the loan application form, print it and make list of documents needed to be attached to the application form.

5. Collect as many needed documents as and when possible

• At CET Counseling

6. Talk to the bank loan kiosks at the CET counseling center and ask for education loan. Choose the bank nearest to your home if present at the center; otherwise go to the next one on your list prepared in step 1. Some banks will even give you a DD required for the payment of the fees at the counseling. Ask for loan amount you decided in step 3 or Rs 4 lakhs for engineering or more for medical or other courses. Get a letter from the bank officer at the counseling center that typically says that the loan is approved in principle.

• After Final Selection of the College You Will Attend or After Admission

7. Apply online on the banks website, if this facility is available. You will receive an email with the in principle approval in a short time, typically 7-10 days.

8. Get a letter of expenses and admission from the principal of the college you going to attend. Collect all the documents that are required with the education loan application from the list you made in step 4.

9. Fill up the application form you printed in step 4.

10. Submit the application and the required documents to the bank nearest to you. Get a written receipt of the application submitted with the date of submission stamped. Getting the receipt is the most important part of the application process. Once you have a written receipt, the bank loan officer is required to follow a well defined and time limited procedure and approve or disapprove the loan. If the bank officer does not cooperate, do not get discouraged. Politely and firmly insist on getting the receipt. Visit the bank multiple times if necessary.

11. The bank officer may ask you to provide a third party guarantor or collateral security even if requested loan amount is less than Rs. 4 lakhs. Show the manager the printout from the bank website and politely tell him that neither is required if the requested loan is less than Rs 4 lakhs. Make sure that the bank officer knows the fact that you are only asking them to follow their own bank’s rules.

12. If the bank is still not cooperating, seek out help of a prominent person in your community who may be able to help you with the bank manager.

13. If that is not possible, talk to the assistant division manager of the bank and explain your situation and request him to help you with processing of the loan application.

14. If you are still having difficulties, email me at appam@yahoo.com with your phone number and I will help you.