Education loan made easier as govt stands guarantee

Students looking for education loans might find the procedure easier than earlier. The government is setting up a guarantee fund that will ensure that the banks do not suffer in case of defaults in education loans. At the same time, there will be a proper tracking of loans by effectively linking information on students with loan details. Let’s examine the factors that will play an important role in education loans going ahead.

The process

The process in which this entire system would work is that banks would need to pay a certain amount as premium to the government for availing of the guarantee. This would be based on the total amount of education loans that are outstanding with the bank. In case of a default, the government would pay the amount to the bank thus protecting the lender from losses. It would mean better conditions for borrowers but with increased responsibility.

Interest rate

One main condition that has been stipulated is that the interest should not be more than 2 per cent of the base rate of the bank. This is a significant move because it caps the rate at which education loan is offered.

There are cases wherein an individual finds that the loan offered is very expensive. This can actually act as a factor that leads to the individual actually deciding against availing of the loan. High cost could also be a reason why borrowers find themselves under a heavy burden when it comes to repayment. The government guarantee to banks will ensure that the cost of education loan is not too high and is affordable to borrowers.

Tracking

Many banks find it difficult to recover education loans as students are often hard to track. On getting jobs after completing their course, they might shift to a new place resulting in change of address.

This makes recovery a tough task. Linking the loan with the Aadhar and other details of the borrower would ensure tracking defaulters is no more a thorny issue. This will also make students responsible as they would know that lenders now have all their details and a default could land them in trouble.

This way both students and banks stand to gain as latter will have timely payments while the former’s credit score, which will also be tracked using the same details, remains unaffected.

Overall

The government guarantee is a giant leap towards ensuring that students are able to get the benefit of higher education through loans. Students will also enjoy financing options as banks will no longer have any reason to deny loans.

Source | http://www.mydigitalfc.com

Regards

Pralhad Jadhav

Khaitan & Co