Can you afford an education loan?

While the oil mafia tried to entice him with bribes to turn a blind eye on fuel adulteration, murdered IOC sales manager S Manjunath refused to waver in the line of duty, despite his own financial constraints.'

A poignant story printed in The Indian Express reveals that, of his modest monthly salary of Rs 25,000, Manjunath was paying Rs 10,100 as EMIs towards two education loans (of Rs 3.5 lakhs) taken to finance his studies at IIM-Lucknow. In addition, three months ago, he had availed of a car loan from his employer (EMI: Rs 1,300).

It feels odd and a little sacrilegious to read about the private details of a deceased person's life. But, in this case, the details are being published to make a point -- that Manjunath could easily have taken the bribes offered and made his life easier.

He had apparently defaulted on the previous month's EMI for the PNB loan, prompting his father to write a stern letter to the son. A letter the son did not live to read...

Till debt do us part

Today, education loans have become a way of life. And that is definitely a step in the right direction.

Without an easily available loan, an IIM education may not have been possible for a middle class student like Manjunath.

But paying back is not as simple as all the banks who say 'Hum se le lijiye (take the loan from us)' would like you to believe.

Because not every MBA graduate gets a fabulous starting salary. Not even graduates from the IIMs. And definitely not, in the case of thousands of students from hole-in-the-wall MBA institutes.

Yet, any and every B-school today is charging several lakhs in fees. The magic solution offered to middle class parents: 'Take a loan.'

Rs 4 lakhs for an MBA course and no one bats an eyelid. Because, there are some things money can't buy -- like an interview call from IIM. For everything else, there are loan schemes. Over 1.75 lakh students nationwide availed of these loans in the last financial year.

Certainly, loans are now easily and freely available. With the change in policy circa 2001, loans upto Rs 4 lakhs don't even require margin or collateral. On such loans, PSU banks charge exactly the same interest as the Prime Lending Rate. Right now, that stands at 10.5 %.

Which is good. But not as good as housing loans that are available at 8-8.5%. Or even car loans that many banks will happily offer at 8.5%. So why are student loans so pricey?

Simply because they are riskier. Historically, banks have been shy of student loans because, even back when fees were far more modest, students have defaulted. To be more specific, they've simply disappeared. And the poor bank doesn't even have an asset to attach.

The problem is more acute in case of students taking loans for study abroad. Those loans are therefore priced higher -- at 1% above the PLR -- and require collateral.

But, now, the government is considering more drastic solutions. PSU banks recently put forth a proposal asking for a bar code or Radio Frequency Identification on passports -- so that students availing such loans can be tracked.

I don't know if it's practical or technically feasible, but it is quite a novel idea!

Think before you...

The point is 'how to finance your studies' is the easy part. But, before joining a particular institute, make sure you have an idea of the kind of salary you will earn on passing out. Most banks offer a six month grace period after which the EMIs begin.

The average salary from the average B-school is about Rs 15,000-Rs 20,000 pm (gross). Ditto for engineers getting into IT jobs. Can you afford to live in Mumbai, Delhi or Bangalore on Rs 10,000 a month (rent, transport, food, bijli, et al) and repay Rs 10,000 as EMI?

Of course, you'll eventually earn more but not right away! A cousin who graduated from a B-school ranked around 25 got a 'decent' job, but found the going tough. The first six months, she was happy enough. Then, the EMI payments started and suddenly every small indulgence became a major issue.

Inevitably, she ended up defaulting on the EMI. And then, hopping jobs twice, lured by a couple of thousand rupees more. I'm not saying this would happen to everyone -- but it's a very real danger!

In the case of MBA placements, it's important to note the fine print. For example, Indiabulls hires MBAs from lesser known institutes as Selling Agents, or Selling and Relationship Agents. The pay package offered to these students is Rs 4.5 lacs pa of which only Rs.1.8 lakhs was fixed and the remaining Rs 2.7 lakhs is 'variable'. This means, it is generally based on your performance or offered as a performance incentive. If your company thinks you are not doing well, it can hold back this amount.

But the worst off would be medical students. Given that they earn paltry sums until they complete their MDs, it makes sense to take a loan only if your dad owns a nursing home or is willing to shoulder your EMI burden for several years to come!

The abroad story

In case of loans for studies abroad, you can borrow upto Rs 15 lakhs (more from private banks). But will you be able to earn in dollars or pounds after finishing the degree -- at least to recover your tuition costs?

If not, are your parents wealthy enough to start forking out the rather large EMIs that will follow?

So be a 'loan ranger' but make doubly sure the country you choose to study in has work permit possibilities. Eligibility for jobs is also linked to what course you are doing.

For example, it may be next to impossible to get work in Australia if you're a media graduate. If you are an accountant, IT professional or secondary school teacher -- professions classified under 'skills shortage' -- chances are much better.

Is going to study accounting in Australia, therefore, a good idea? I would say only if you are turned on by accounting in the first place. But there are folks who think otherwise.

The future

Student loans have long been a fact of life for college goers in the US. Interest rates (linked to their PLR) are lower than in India, but the sheer number of people who take loans (practically every college-goer!) means the overall student loan market is huge.

The happy news for them however is that interest rates on federal student loans have dropped to an all-time low -- at 4.06% in July 2005. And loan payback periods are far longer than the 5-7 years offered to Indian students.

As more and more Indians turn to education loans, I expect we will see better rates and more options. Assuming most of the current loanees pay up and don't spoil the party for future generations!

Choose wisely

So, what am I saying? That loans are a burden to pay off -- so don't bother getting an education? Not at all.

I'm just saying that you should make your choices wisely. The best education adds long-term value -- and you have to be willing to pay the price.

The problem is, not all degrees, diplomas and quasi-degrees/ diplomas are really a value-add. But we live in a culture where people think an 'additional qualification' is definitely an asset. At least it looks good on paper...

But, sometimes it's better to keep that kaagaz kora -- save on those EMIs and write your own destiny!

Secondly, even if you've joined an institute of some repute, be prepared for some amount of struggle in the initial years. And never, ever go overboard on those credit cards banks will queue up to offer you now that you are 'earning'.

Paying off a student loan is painful but unavoidable. Paying 24% interest for things you could do without but bought on credit anyway is just plain stupid. And maybe you do deserve to burn in repayment hell!

Rashmi's earlier columns: