MBA 2016: Funding; know how to avoid falling into vicious circle of debt trap

Add Review

MBAUniverse.com News Desk |
April 23, 2016
You may receive a letter from some bank informing you that your MBA study loan has been sanctioned in principle and you could contact the bank on any working day
Getting into education loan trap is easier than you think and usually we run into a study loan scheme which appears lucrative but has many loopholes to plug

Very shortly you would be finalizing your MBA admission to one of the 19 IIMs or some other top B-school like MDI, IMI, IMT, NITIE among others. It is also possible that even before finalizing the admission to a top B-school, you may receive a letter from some bank informing you that your MBA study loan has been sanctioned in principle and you could contact the bank on any working day.

This may give a sigh of relief to you at least to the extent that you do not have to search for the Bank or some other resources to meet the huge tuition fee and lodging – boarding expenses during your course of study at the B-school. Please remember it is not a petty amount to be spent during your 2 year MBA programme. In fact you will have to shell out somewhere between 12 to 20 lakhs to complete your course.

No doubt that after getting the admission offer letter from the top B school, the next step is to find the source of funds. The best option being the Education loan, we usually fall for any study loan. If we analyze and compare the various facts, application of  interest and its rate structure apart from package offering by different banks, it would save us from falling into the loan trap.

MBA study loan: Check before falling for it
Loan for MBA education is one of the few worthwhile reasons for getting into debt. But falling into a trap without giving it a proper thought is definitely bad which shows your poor management skills.

Getting into education loan trap is easier than you think and usually we run into a study loan scheme which appears lucrative but has many loopholes to plug.  Sometimes we have to approach other banks with the request to take over the existing education loan to get rid of the vicious cycle of these schemes.

We go on paying regularly the high loan instalments but the Principal loan amount does not appear going down and remains high as ever. There could be hidden charges, high rate of interest, compounding interest system, guarantee and security system as well as irrelevant documentation and ignorant bank personnel added to it, which may not allow us to come out of the debt trap.

Don’t stretch too far
Sometimes you spend more than you can afford and then struggle to pay off the loan getting compounded at a hefty interest rate. Remember, how attractive the education loan scheme might look, the repayment of it can take years of your life, to recover from. So be cautious while moving forward with your idea of taking education loan to pursue your dream MBA.

Study the schemes of different Banks
MBA education is expensive and you may need Rs.10 to Rs. 20 lakhs to pursue it.  Find out which Bank can cater to your needs. If you need Rs. 20 lakhs and the cap for education loan of the Bank is Rs.15 lakhs, it will be a difficult situation and you will have to arrange additional Rs.5 lakhs from some other sources which may put you in multiple financial burden.

Prefer the Bank not asking for processing charges
Some of the banks and financial institutions  charge one time processing fee of Rs. 5000 or so or charges it in the form of 0.5% to 1% of loan amount. Most of the public sector banks have no such charges especially on education loans. Still you have to check whether it is charged by the Bank whom you are approaching and whether it can be waived. In most of the deserving cases Banks can waive it also.

Choose the Bank with ‘No margin’ requirement
There are some Public sector and private Banks who do not ask for margin amount on MBA education loan even for an amount as high as Rs. 20 lakhs for example Central bank of India, Union Bank of India, Avanse Financial Services, SBI. On the other hand there are banks who will ask for a margin in a range of 5 to 10% on the loan amount exceeding Rs.4 lakhs.  It is always better to confirm from the bank about their updated schemes since sometimes they also do not update it on their site.

Select the Bank with lowest Interest rate
High or low interest rate decides the cost of funds you are borrowing.  This is most important. It is the price for the education loan that you are going to pay. New interest rate structure defines the base rate, this base rate is usually the base lending rate. A bank can fix a rate over or below this base rate which will eventually become the actual interest rate. For example if the base rate is 10.25% pa and the bank announces its education loan interest rate as 0.25% above the base rate, it will become 10.50% (add 0.25% to base rate). Sometimes when there is mention like Base Rate + 1.50% or 2.25% above the base rate, we are tempted to think that it means a very low interest but in fact it is high enough.

Before applying for MBA education loan, you should check the base rate of the particular bank and then add the rate mentioned by the bank.

Interest charged during MBA course
This is another grey area where financial institutions can play foul unless regularly monitored.  Most of the Banks charge simple interest till your MBA course is complete. Banks define it as moratorium period and also grant additional grace period between 6 months to 1 year to begin the repayment of loan.  During their period you are supposed to pay simple interest and not compound interest.

It’s very much possible while entering the details and data in their computer system, either due to omission or due to the ignorance of banking personnel they are not able to feed the correct moratorium period or they may have faulty software.  Whatever may be the reason but the loss will be yours as the system will go on compounding the interest even during the moratorium period.

It has happened with number of MBA, Engineering, Medical and other professional educational loans. Number of candidates despite running from pillar to post couldn’t get it corrected.  The height of audacity has been so much that even the staff of the bank was not spared.

Understand the mechanism with example:

Admission offered in IIM Ahmedabad
Sanctioned MBA education loan-Rs.20 lakhs ; Rate of intt-10.70%; simple interest during moratorium period
All the expenses at IIMA-Rs.18 lakhs
Fee and other charges to be paid in 4 equal instalments:  Rs.4.5 lakhsx4= Rs.18 lakhs
1st instalment paid by the bank-Rs.4.5 lakhs; yearly interest-4.5 lakhs x 10.70% = Rs 48150/- pa
Monthly interest shall be - Rs.48150/12 = Rs.4012/= per month

In case of simple interest Rs.4012/- only per month will be charged, whether you repay the interest during course period or don’t pay it. In no case it will be added to your principal amount of Rs.4.5 lakhs. Even if it is not parked separately there should not be any interest charged on this interest if not paid for a shortwhile.

The catch: Banks forget the mechanism many times and the monthly interest amount is added to the principal amount and next month you will find higher amount of interest having been charged in your loan account.

How to check: Check every month the application of interest in your account; ask for account statement. Banks provide internet facility you can check and verify at your end also. In case of discrepancy, Immediately contact the bank in writing. They forget the verbal communication, this is true especially in case of public sector banks.

Changes in interest rate
Almost all the Banks are providing MBA education loans on floating rate of interest. It means if there is any change in their base rate the effective interest rate will also change.

What should you do: In case of increase in base rate all the banks remember to change the interest rate. But in case of reduction in base rate or reduction due to other factors, they forget to implement. Better to confirm on the Bank’s site the base rate. The irony however, is that they also forget to update on their site. Be cautious and monitor regularly

Repay interest during course period
Some of the banks reduce 0.25 to 1% interest burden, if the interest charged during course period is regularly repaid.  It can also reduce a substantial financial burden.

Work Experience can reduce the interest
Number of banks have brought this feature. If you have work experience of 2-3 years and are pursuing MBA, interest concession in the range of 0.25 to 0.5% can be available to you. Please enquire about it before applying for education loan

Less Interest charged from girls
MBA education to girls can be cheaper as concessional rate of interest will be applied on their loans. Banks like PNB offer education loans to girls at lower interest rate.

If in India, go for longer Repayment term
Repayment ideally starts after completion of MBA course.  It can go from 1 year to 9 years.  It’s always a good idea to repay early but if you can get longer repayment period, you can get relief in Income Tax. Entire part of interest repaid on education loan is reduced from your income. It can be a better option to have a longer repayment period.

On the reverse of it, there are banks who offer interest benefits on MBA education loans for shorter repayment period for example PNB.

Don’t fall prey: You have nothing to lose
Although most of the financial institutions do not charge prepayment penalty on education loan repayment, you never know about the change in their policy. Just confirm this fact before applying.

There are number of competitors and competition among public and private sector banks is high enough. Find out if there are any hidden charges, understand their mechanism. The interest is usually charged on daily reducing balances, ask and confirm this fact from the bank. Do not allow either the Private or the Public sector banks to cheat you on any point.  Instead of following the irregularities later, it’s better to nip in the bud.

Related Article

MBA Admission 2016: Better options than new IIMs available; Weigh & choose the best

MBA Admission 2016: Ask for 100% study loan from Bank; know the required documents & process

MBA admission 2016 open in Delhi NCR: Come out of dilemma & exercise your option

MBA Admission 2016: Don't fall prey to tall claims; check for the updated AICTE Mandatory disclosure

MBA admission 2016: Chances to get an IIM with low scores in CAT 2015; wait till April

MBA Admission 2016: Placement packages rising; right time to pursue your MBA

MBA Admission 2016: How you can manage fee & other Expenses without making a big hole? Check now

Stay tuned to MBAUniverse.com for more updates on MBA 2016 funding