The Telegraph
Since 1st March, 1999
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Learn now, pay later

Vineet Gupta has secured admission to post-graduate courses in a number of US universities. His qualifying score in the GRE exam wasn’t very impressive. Ergo, no tuition waiver or teaching assistance.

The two-year course costs Rs 14 lakh — and that’s enough to make his dad quail at the prospect of sending his son to the US to get that degree he is ready to die for which will land him that dream job.

Gupta senior — with son in tow — has started to shop for loans from banks. He is informed that he will have to provide 15 per cent of the sum of Rs 14 lakh — or Rs 2.1 lakh — in cash, and securities worth Rs 11.9 lakh.

Senior Gupta borrows against his provident fund and rustles up the Rs 2.1 lakh, while a bank agrees to provide the remaining amount. But the family has to mortgage their home to secure the loan.

Banks fund living expenses and course fees. The applicant has to list expenses to establish the amount that he seeks to borrow. The estimate should include return airfare and the cost of study material.

The interest on study loans is linked to prime lending rate (PLR) which varies from bank to bank. For most banks, it’s around 12 per cent at present.

A number of bankers say the recent 50 basis point cut in the repo rate — the rate at which the Reserve Bank of India borrows funds from commercial banks — to 4.5 per cent will eventually bring down the cost of study loans in the near future.

If prohibitive expenses stood between you and a foreign degree so far, you can now achieve it with borrowed money. And the cost of borrowing — or the interest rate — is not too high either. It’s probably cheaper to study with borrowed money than to buy a car.

Nationalised banks offer a maximum of Rs 15 lakh in loans for courses abroad, and Rs 7.5 lakh for studying in India. But HSBC is more generous — it offers up to Rs 25 lakh in loans even for a course in India, but the interest it charges is higher than its competitors.

State Bank of India (SBI) appears to offer the most competitive rates on study loans thanks to its low PLR. It charges 10.85 per cent for loans up to Rs 4 lakh and 11.85 per cent for amounts greater than that. HSBC, on the other hand, charges 12.25 per cent for funding post-graduate courses and 13 per cent for undergraduate studies. However, like all modern banks HSBC offers ‘relationship discounts’ to existing customers.

Nationalised banks charge a simple rate of interest and offer a moratorium during the study period. Repayment starts only after one has landed a job or a year after completion of the course. However, if you pay the interest during the study period, you get a discount of up to 200 basis points on the interest rate.

For instance, Allahabad Bank offers a 2 per cent rebate on the interest rate if the interest is paid during the study period. The discount makes Allahabad Bank’s rate more attractive than SBI’s, which offers a rebate of 1 per cent for payment of interest.

However, if you borrow from private banks, you’d have to pay the interest from the first month.

Although HSBC offers a higher amount, it charges interest at a quarterly compounded rate.

All banks — both private and nationalised — charge a quarterly compounded rate of interest after the moratorium.

Banks do not ask for collateral security for study loans up to Rs 4 lakh, but for amounts greater than that the applicant has to mortgage financial assets, gold or property, the value of which is equal to the loan amount. Besides security, what most banks demand is a guarantor who will be liable for repayment of the whole amount — the principal plus interest — in case of default.

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