Poor can benefit from this education loan scheme

Sometime late last year, I got talking to a young man Ajay (who delivers milk to our house in the morning) when he had come to collect the monthly bill amount on a Sunday.

Ajay was smart and ambitious and he told me that he had completed his graduation and just appeared for the MBA entrance exam.

So far, he had financed his education by doing odd jobs, since his parents barely managed to eke out a living running a small street-side eatery joint.

He was keen to do an MBA and was convinced he could crack the entrance exam. He was worried about how the course cost was going to be funded.

Even if he got into one of the cheaper institutes, it would still cost anywhere around Rs5 lakh. Luckily, his parents realised the value of education and were willing to sell/ pledge the family jewels. But that would raise just around Rs1.50 lakh or so.

That’s when I informed him about the education loan schemes devised by the PSU banks, wherein education loans up to Rs4 lakh will be available for courses like MBA from AICTE-recognised institutes without the requirement of any collateral security.

His parent(s) would need to be co-borrowers, but the fact that they had a low income would not have an impact on the loan sanction.
Not just that, since he belonged to a family with income below Rs4.50 lakh per year, the interest during the 2-year course period would also be paid by the government as per the scheme.

Ajay went back a charged man and left me with the pleasant glow of having done my good deed for the day.

He was back the next Sunday. The PSU bank he had spoken to, had asked him to come back after he cleared the MBA entrance exam and secured admission.

I asked him to wait for the results. He came back a few months later. He had passed the exam and had secured admission in a decent management institute in Mumbai itself.

Now he was frantically looking for the education loan.
He had approached three PSU banks and all of them were shunting him from one desk to another without giving any firm answer.

Fortunately, I knew a senior official in one of the banks. I spoke to him and gave the details of the case, including Ajay’s excellent academic credentials despite the economic background and managed to get the loan sanctioned for him reasonably quickly after that.

He was profuse in his thanks. He also told me that the bank had informed him that they had absolutely no idea about the interest subsidy scheme that he was talking about. I told him to take the loan and that we would worry about the subsidy later.

The bank officials were right. The scheme had been announced in the budget, but no further action had been taken to activate the scheme.

This scheme is aimed at providing interest subsidy to the students taking up education loan to pursue technical/ professional education studies in India after class XII.

The loan is only available to students whose total gross parental/ family income from all sources is less than Rs4.5 lakh. Under this scheme, the interest for the entire moratorium period — meaning the course period plus one year, or six months after getting job, whichever is earlier — will be taken care of.

The scheme is applicable for all loans disbursed from April 1, 2009.

This is an excellent scheme. To take a small example, let’s take a student opting for an MBA course. Say the course fee is Rs4 lakh for the two-year course, so Rs2 lakh is to be paid at the start of every year.

Keeping these assumptions in mind, the total interest accumulated in the loan account @ 11% over a period of two years is around Rs44,000.

This entire amount is paid to the bank by the government. Over and above this, since this is treated as if the interest is paid during the course period, the bank offers a concession of 1% and hence, the interest rate becomes 10% once you begin repayment.

This brings down the EMI from Rs6,849 to Rs6,640 for a seven-year period. Both are excellent benefits.

The HRD ministry has recently announced some guidelines for operationalising the scheme. Canara Bank has been appointed as the nodal bank under this scheme.

The HRD ministry is also going to announce the courses for which such subsidy will be available. This should anyway happen soon (or may already have been done).

The biggest challenge is that the family gross income will need to be certified by a public authority(ies), which is (are) authorised by the respective state governments for this purpose.

This scheme is based completely on economic background and not on social background (which normally are meant for SC/ST or OBC categories).

We were not able to get any information from the web or from the banks about which agency is going to do this certification and what will be the basis.

Most state government agencies that certify incomes are basically geared to certify families below the poverty line or as economically weaker class, where the definition of income is quite low.

A gross family income of Rs4.50 lakh is not exactly low by our standards, and how these agencies are going to deal with this certification will need to be watched.

Even if this excellent scheme is implemented well, it will still leave the main issue unanswered — how will meritorious but not-so-well-off people like Ajay get the loan if the loan they require is above Rs4 lakh (which requires the parents to have sufficient income to justify the loan or for provision of collateral).

If they don’t get the loan at all, what good will the subsidy do?

The writer is CEO, Apna Paisa, a price & features comparison engine for loans, insurance and investments. He can be reached at hrdna@apnapaisa.com