How to Pay for IIMA or Harvard

23 April 2010

It's the final innings for admissions to the prestigious Indian Institute of Managements and other business schools.
23 April 2010
In a few days, students will know whether they have made it or not. If you are chosen, you may not get too much time to celebrate ? you have to figure out how to pay for that expensive education.
Several IIMs recently increased their fees by 100,000 rupees or more. A two-year management of business administration program at the coveted IIM Ahmedabad now costs around 1.4 million rupees ($31,500), while the fees are 1.35 million at IIM Calcutta and 1.3 million rupees at IIM Bangalore. Only a small percentage of students qualify for breaks in fees at these schools.

Luckily, there's help at hand.

India's banks have been increasingly boosting their education loan portfolios and new players are entering the market. In December, home loan giant HDFC Ltd. bought a 41% stake in non-banking financial company HDFC Credila Financial Services, which specializes in giving education loans. HDFC hopes to eventually buy out the entire company.

For banks, education loans are bitter-sweet ? they carry a higher interest rate than some other loans like home loans, but they are also more risky. Due to Reserve Bank of India rules, banks are not allowed to accept any security or collateral for loans of up to 400,000 rupees.

Education loans are still a small portion of banks' loans portfolios. But the government considers education loans to be one among a list of "priority-sector" loans so government banks sometimes give these loans to fulfill their quota for priority-sector lending. And in recent years, several private banks have been increasingly focusing on this area.

Unfortunately, many deserving students still struggle to get loans. Banks ask for a co-signor to the loan ? typically a parent -- and for 100% collateral to cover the loan even when it contravenes government rules. That can be very tough for the poor to afford, says K. Srinivasan, co-ordinator of Education Loan Task Force, an online activist group which works with students of Tamil Nadu. "Because of lack of finance, many of the students with more than 90% marks (in school) have to work at tea stalls," says Mr. Srinivasan.

Banks typically give loans of up to 1 million rupees for study within India and up to 2 million rupees for studies abroad. For loans of more than 400,000 rupees, you need to put in some money of your own -- 5% for domestic education and 15% if the student is going abroad. For large loans, banks accept a number of assets as collateral, such as property owned by you or your co-signing parent, a life insurance policy with a surrender value, or fixed deposits in the bank.

To get a loan, you must already have admission in what the bank considers to be a worthy institution. Many banks publish a list of courses which qualify for loans, but they don't list each and every institution approved by them. Which means you will still have to go to your nearest bank to find out for yourself. IIM's qualify.

While banks are required to lend to all eligible applicants, it may be easier to get the loan if you already have an account or other relationship with a particular bank.

At the moment, interest rates on these loans vary from 11.25% to 12.75% depending on the amount of loan. These rates can change during the term of the loan, in case the Reserve Bank of India raises broad interest rates.

There is a lot of variation though. Students of IIMs and some other prestigious schools can get better deals. Union Bank of India, for instance, is charging only 10.5% to students admitted to a select number of schools. Women pay 0.50 percentage point less.

Unlike banks which typically charge a fixed rate for a certain category of students, HDFC's HDFC Credila charges different rates depending on the school and the student's grades. HDFC Credila country head Prashant Bhosle says that this ensures that all students have a good shot of getting a loan, even if it's at a little higher cost. HDFC Credila's interest rate ranges from 9.75% to 12.5% currently.

You have to give the usual list of documents to support the fact that you do have admission to the particular school, your and the co-signor's bank account and income tax statements, proof of residence, and statement of assets and liabilities.

Students planning to study abroad can also apply for loans, though sometimes they face a chicken-and-egg situation. Some foreign colleges, such as those in the U.S., require a proof of finances at the time of admission. However, most banks in India don't sanction a loan till the student has a confirmed admission in the given college.

HDFC-backed HDFC Credila has a solution to this. It provides a letter of credit on behalf of the student which typically satisfies the college, and then converts it to a real loan when the admission goes through.

Students are expected to start repaying their loans within six months of landing a job or after one year of graduation, whichever is sooner. Most banks require that students pay simple interest on the loan even as they are studying. The loan is extended for five years to seven years typically.

Bankers advise students to be careful while selecting the course and college they want to get in to, especially given the large number of new institutions that have sprung up around the country. Just because you're hungry for admission, don't rush into a program which may not result in a good salary and future, says C.S. Jain, head of retail banking at IDBI Bank Ltd.