Last Updated on May 3, 2014 by MBAUniverse.com News Desk
10 steps to save you from falling into MBA Education loan Trap
Falling into a trap without giving it a proper thought is definitely bad which shows your poor management skills
Having secured the admission offer letter from the top B schools, now the next step is to find the source of funds. The best option being the Education loan, we should know the steps that can save us from falling into the loan trap.
Education loan; good reason to get into debt
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 bank the scheme of which appears lucrative but has many loopholes to plug. Sometimes we have to approach other banks to take over the existing education loan to get rid of the vicious cycle of these schemes since it becomes difficult to regularly repay the same after competition of the same due to their hidden charges, high rate of interest, compounding interest system, guarantee and security system as well as irrelevant documentation.
Watch your steps
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 alluring that 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.
Step-1: Read and compare 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.
Step-2: Choose the Bank where no margin is needed
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. 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.
Looking for Options in Delhi NCR? Talk to Admission head of your Desired B-school, Click Here
Step-3: Prefer the one without 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 2% 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.
Step-4: Interest rate structure
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.
Step-5: Interest application in moratorium period
This is another grey area where financial institutions can play foul unless regularly monitored. Most of the Banks charge simple interest during the moratorium period i.e.course period plus the grace period granted to begin the repayment of loan.
Its 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 couldnt get it corrected. The height of audacity has been so much that even the staff of the bank was not spared.
Let us understand the mechanism with an 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 lakhsx10.70%=Rs48150/- 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 dont pay it. In no case it will be added to your principal amount of Rs.4.5 lakhs; the interest amount will be parked separately.
Where the catch is: 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.
Step-6: Subsequent interest rate changes
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 Banks site the base rate. The irony however, is that they also forget to update on their site. Be cautious and monitor regularly
Step-7: Repayment of interest in moratorium period may reduce interest amount
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.
Step-8: 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
Step-9: Interest Rate is less for females
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.
Step-10: Repayment term
Repayment ideally starts after completion of moratorium period. It can go from 1 year to 9 years. Its 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.
Negotiate vigorously; you have nothing to lose
Although most of the financial institutions do not charge prepayment penalty on education loans repayment. But 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, its better to nip in the bud.
Also Read other Articles:
Education loan for MBA, Think twice and negotiate with banks
Is your Inbox hampering MBA Dream? Glass half full or half empty, it's your wish!
MBA Admission: I couldn`t do my MBA from a top B-school. So What?
Wait before taking MBA admission, better be late than sorry
Are IIMs wasting time of MBA aspirants? What's your take?
Want a Fee refund from your MBA College? Admission withdrawal cases; How to avoid
Stay tuned to MBAUniverse.com for more updates on MBA funding
Education loan; good reason to get into debt
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 bank the scheme of which appears lucrative but has many loopholes to plug. Sometimes we have to approach other banks to take over the existing education loan to get rid of the vicious cycle of these schemes since it becomes difficult to regularly repay the same after competition of the same due to their hidden charges, high rate of interest, compounding interest system, guarantee and security system as well as irrelevant documentation.
Watch your steps
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 alluring that 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.
Step-1: Read and compare 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.
Step-2: Choose the Bank where no margin is needed
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. 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.
Looking for Options in Delhi NCR? Talk to Admission head of your Desired B-school, Click Here
Step-3: Prefer the one without 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 2% 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.
Step-4: Interest rate structure
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.
Step-5: Interest application in moratorium period
This is another grey area where financial institutions can play foul unless regularly monitored. Most of the Banks charge simple interest during the moratorium period i.e.course period plus the grace period granted to begin the repayment of loan.
Its 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 couldnt get it corrected. The height of audacity has been so much that even the staff of the bank was not spared.
Let us understand the mechanism with an 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 lakhsx10.70%=Rs48150/- 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 dont pay it. In no case it will be added to your principal amount of Rs.4.5 lakhs; the interest amount will be parked separately.
Where the catch is: 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.
Step-6: Subsequent interest rate changes
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 Banks site the base rate. The irony however, is that they also forget to update on their site. Be cautious and monitor regularly
Step-7: Repayment of interest in moratorium period may reduce interest amount
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.
Step-8: 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
Step-9: Interest Rate is less for females
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.
Step-10: Repayment term
Repayment ideally starts after completion of moratorium period. It can go from 1 year to 9 years. Its 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.
Negotiate vigorously; you have nothing to lose
Although most of the financial institutions do not charge prepayment penalty on education loans repayment. But 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, its better to nip in the bud.
Also Read other Articles:
Education loan for MBA, Think twice and negotiate with banks
Is your Inbox hampering MBA Dream? Glass half full or half empty, it's your wish!
MBA Admission: I couldn`t do my MBA from a top B-school. So What?
Wait before taking MBA admission, better be late than sorry
Are IIMs wasting time of MBA aspirants? What's your take?
Want a Fee refund from your MBA College? Admission withdrawal cases; How to avoid
Stay tuned to MBAUniverse.com for more updates on MBA funding