Tuesday, November 29, 2005

Till debt do us part

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

So reads the poignant story in today's Indian Express.

Details printed by the paper reveal 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, 3 months ago, he had availed of a car loan from his employer (EMI: Rs 1300)

It feels odd and a little sacrilegous 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...

Feeling Loansome?
In the last 5 years, education loans loans have become a way of life. Fees at professional schools - whether medical, engineering or management - have shot up. If and when students complain, they are offered a quick and ready solution: "take a loan".

And yes, getting a loan is not difficult. Loans upto Rs 4 lakhs don't even require margin. But repaying the loan is not all that easy. The interest rates charged by banks like SBI and Bank of Baroda is 10.5%.

This is linked to the BPLR (Bank Prime Lending Rate). Compared to housing loans which are available at 8-8.5%, education loans are pricier. But here's the surprise -BOB will even give you a car loan at 2% below the prime rate (ie at 8.5%).

I am not a banking expert so I can only conjecture that educational loans (below Rs 4 lakhs) are unsecured and hence the 2% additional interest rate charged is to cover the risk of default. In case of both cars and houses, the bank can attach the asset in case the borrower fails to repay.

Student loans have long been a millstone around the neck of college goers in the US. Interest rates (linked to their BPLR) 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 dropped to an all-time low - at 4.06% in July 2005.

This is a political decision. "The Bush administration is committed to helping students and their families finance college and career training," declared Secretary of Education Rod Paige while announcing the rate cut.

Student loan-seekers are not yet a big enough interest group in India but in years to come they will be. Future PMs, please take note!

Soon enough there may be a market for loan consolidators as well.

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 6 month grace period after which EMIs begin.

The average salary from the average b school is about Rs 15-20,000 p.m. 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 ICFAI Business School and got a 'decent' job found the going tough. The first 6 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 more. I'm not saying this would happen to everyone - but it's a very real danger!

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!

Loans for studies abroad (which require collateral, and attract higher interest rates) are another case in point. You can take a loan - even upto Rs 50 lakhs. 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. And that the institute you join has genuine campus placements. In case of bschools, a posting on www.pagalguy.com should get you an honest answer.

And even then, be prepared for some amount of struggle in the initial years. 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...

Unfortuntely, sometimes it's better to keep that kaagaaz kora. Save on those EMIs. And write your own destiny.


  1. This is more of an eye-opener for students.
    Nicely writte

  2. Seriously, it is very important to think twice before considering a loan. Thank you for the information :)

  3. Pretty well writtten , with good amt of data analysis done. Would like to add this point that going for an MBA in India or doing an MS in US should not be a decision based on the herd menatalty but a well thought of decision. One should understand that not everything needs to be done by everyone to be succesful. Follow ur heart, and think where do you see yourself in a long term, and what is the best path that can be taken to achieve it.

  4. Little correction. They earn paltry even AFTER MD. Hope you know that the payment for MD graduates which Tamil Nadu Goverment now offers is Rs 10000. (Rs 8000 for MBBS and Rs 9000 for Diploma)

  5. I wish every young aspirant reads this before they get committed to higher studies anywhere.

    Great piece.

  6. There are some tax benefits for repayment of principal and interest and hence might actually be beneficial to the student. I don't the exact reason for the high interest rates. But the general feedback from PSU banks is that the MBA students just vanish after their MBA. Hence the banks don't really hold the MBA grads in high regard. More than the ability to pay back, lot of MBA grads don't repay because of lack of inclination to do so. ET does carry such articles once every quarter.

  7. Yes Rashmi Ur observation is correct Bankers have 2 have a risk premium on unsecured loans {& Hey its still way below a Personal Loan which would be at 13-14 %/Of course we cant really price a loan cheaper based on the nobility of the objective unless we are a Govt Bank}.

    I dont know how cheaper it will get because if you take international banking experience with Educational Loans its even worse.

    Eg: ABN Amro used to have a loan tie up with INSEAD on which they pulled the plug after there was mass defaults by erstwhile students and it clearly is not easy chasin MBA's on a cross boarder basis for an Educational Loan.

    The better alternative is to have some kind of Alumni Fund to help really needy students with a really long payback.

    U do make a lot of pertinent points ,its got a nice paradoxical vein u shudve named it "Take a Loan only if u can afford one !!"

  8. so in case of manjunath-do his parents have to pay or is it written off.vasanthi.rediffblogs.com

  9. sorry just read the footer on IOC package offered to Manjunaths family which says that the loan is wavered and other benefits as well

  10. The whole problem is because people value the so called education provided in college too much and are willing to pay the exorbitant amounts demanded by colleges. It is high time society gives school and college education its true worth and stops behaving as if school or college education is a great thing. Only then will the extortion of people by those involved in the education business stop. After all college education is only a matter of timepass and brand building and is one of the biggest frauds perpetrated in the world as nobody ever uses what they learnt in college.
    The same applies for healthcare as well where unnecessary tests and surgeries are done and it is high time some corrections happened in that regard.

  11. Though it makes good sense to leave higher education to market forces and subsidize primary education, the approach of government in providing means- scholarship is loathable. Government provides huge sums of money to premier institutes(atleast IIT's) to help those who can't afford to pay high fees. But it has become yet another case of a good scheme with poor planning.
    One of my friends whose family income was just greater than the limit set by governement couldn't benefit whereas a fellow who owned a bike and laptop could! The difference was that former's father was in service and paid full income tax and the latter's father being a businessman showed lesser income than what he actually earned. The result - my friend had to take a loan to fund his studies.
    I think such a scheme would exist in IIM's too but does it really help the needy?

  12. It's after all case of investment,returns & risk. Afterall for higher returns you need to take the risk to taking a loan. It's the same way you would do starting a venture...u need to invest something upfront and it might payoff later or it might not. There is a element of risk. It's simple...as in every decision you make in life. The pertinent thing is to be aware of this fact and take backups...
    Like to add a bit on Manjunath....feel the Rs 3 lakh investment paid off many times over...it created a national hero whose aura will inspire many others after him. So the 3 lac has been paid back to this nation a hundered fold...

  13. after reading a few of the line regarding manjunath, i started thinking about the life of many of these 'ordinary' people whose life just go unnoticed. we treat few persons like politicians, cricketers, actors like a superstars but ignore the high quality of self respect, high moral values etc. that few people like manjunath maintain in their life. these people lay often sacrifice their well being and leisures have moral values highere than many of the so called heros and yet all these goes unnoticed in most of the cases. for me these are not 'ordinary' people but real heros which society just fails to recogize.

    regarding the financial support offered by his company is a good gesture on their part, what actaually needed is that such things should not happen at the first place since no amount of money can create a person of of the standard of manjunath.

    i am sure there will be many more manjunath's in this country and i sincerly hope that this episode dosn't happen to them as well.

  14. I will go with the last line " unfortunately sometimes it's better to keep that kaagaaz kora. Save on those EMIs. And write your own destiny".........but why unfortunately????????

    Life is not about earning degrees.....it should be about making your own destiny ...the way you like it.

  15. Hi Rashmi,
    Thanks a lot for all the information. This article is very useful for us, since we plan to take up loans for our future studies. Thanks a lot! Please write articles on these lines...

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