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The problem with Education Loan

Friday, August 10, 2012 by Rajiv Raj

el101n1Nitin Nambiar, 22, had just graduated with a MBA degree from a college in Sangli and had got a campus placement in Mumbai. Six months after he moved to Mumbai to start his job, he stopped repaying his education loan. His logic was that since he had changed his address, the bank wouldn't be able to trace him and his student loan would be written off. In a few months, that was exactly what happened. Nambiar was very proud that he had gotten away with 'fooling' the bank.

What Nambiar hasn't realised is that he has just made it very difficult for students across the country to get access to education loans. Also, he has put his aspirations of owning a house or a car in the future in jeopardy as his payment behaviour would now be reflected in his CIBIL credit report.  It's because of people like Nitin Nambiar that banks are imposing very strict conditions on student loan applicants. On March 31, 2011, the number of education loans outstanding in public sector banks was at Rs. 43,074 crore from 2.2 lakh accounts. Right now, the figure could be closer to Rs. 50,000 crore. The number of loan defaults for the same period was Rs. 1,600 crore. Non-performing assets are a huge problems for banks and every time a student defaults, it becomes more difficult for others to avail loans. And students who have stopped paying or defaulted on loans have put their credit ratings at great risk. Their CIBIL scores and credit reports have been badly affected and they are unaware of this fact.

Public sector banks disburse around 95% of education loans in the country at an average interest rate of 12%. Private banks charge around 14%. So the more students default, the more banks clamp down.

A major reason for student defaults apart from 'fooling' the system is the large number of institutions offering higher education courses in the country that cost a lot but have little value in the job market. So when students graduate they often land low-paying jobs that do not allow them to pay back their loans.


MadanRajiv Raj

Rajiv is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India’s first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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