Studying abroad? Why you MUST insure your education loan

The murder of an Indian student in Britain last December brings into sharp focus the necessity for insuring an education loan if you are going abroad for expensive higher education.

Indian student Anuj Bivde's horrific and senseless murder in Manchester on December 26, 2011 sent shock waves across UK as well as in India. The victim arrived in Britain from India last September to study microelectronics at Lancaster University. His death has shattered his family. It has also, most likely, landed them with the unfair burden of having to continue to pay for the education loan his family took to send him to Britain.

Why insuring your education loan is significant?

Parents, especially from middle class backgrounds, who send their children abroad to study, take huge loans from banks to finance these studies and also, in some cases, re-mortgage their homes.

When such a sudden tragedy happens, it could result in huge additional financial implications for the family who will have to pay back the loan. The prospect of paying back thousands of pounds/dollars in these circumstances can be daunting, if not almost impossible in some cases. Parents and families often plan to pay back an education loan when their child starts on a career made more successful (financially) by these further studies. The same situation can also arise in times of economic difficulties like we witnessed when recession struck in 2008.

Despite such risks, is taking an insurance against education loans a common scenario amongst Indian students? The answer, sadly, is: No!

Courtesy: Investment-mantra.in

Sunita Kulkarni, a successful student counsellor based in Pune, stresses on the fact that students MUST make sure their education loan amount is covered under adequate education loan insurance."Students must buy education loan insurance as cover, especially in case they are pursuing costly courses overseas," she says.

Kulkarni cites how during the 2008 financial markets meltdown, many students studying overseas may not have imagined that they would nearly default on their education loans. Just as they were completing their course, the global economic crisis loomed large on the campus recruitment drive.There were offers, but the fancy salaries were not coming their way.

"The salary was just about enough to make ends meet. Students couldn't start repaying the bank immediately as per the loan repayment schedule," she adds. She explains that banks accept collaterals (borrower's pledge of specific property to a lender to secure repayment of a loan) while disbursing high value education loans. The ownership of such assets can be transferred to the bank if parents/students default on paying back the loan of their child.

Kulkarni adds that for instance, Credila, an HDFC Ltd company offering student loans, accepts non-agricultural land, houses, apartments/flats, fixed deposits assigned in favour of Credila as collaterals.

It is therefore strongly recommended for students to take insurance against an education loan, especially when the loan amount is substantial.

In the case of some banks, when the loan amount is greater than a specific amount, banks usually prefer students to have Life Insurance Corporation (LIC) policies equivalent to, or more than, the loan amount.

Dena Bank, first instance, has tied up with LIC to offer life insurance cover to education loan borrowers. This is nothing more than a security feature that also forms a part of your collateral. In case the student is not able to pay back the loan, the bank does not lose money on it and can recover the outstanding amount from the student's LIC policy.

Not taking insurance on an education loan, a mistake

Prabhjot Gill, a student who recently came back to India after pursuing his higher studies in UK adds, "After reading about the mindless murder of the Indian student in UK a few days back, I realised how big a mistake I made by not getting insurance against my education loan."

He elaborates that he took a loan from Credila to fund his higher studies at a leading university in UK but the idea of insuring his loan never struck him. "I had no idea that such insurance is also available," he admits.

Aditya Bhargava, a senior executive at a leading private insurance company adds "The importance of insuring an education loan is normally ignored by majority of students and also their parents. "They look towards it totally as an unnecessary expense."

He stresses that students studying overseas should look at plans like ICICI Lombard Overseas Student Travel Insurance which provides students with medical and non-medical insurance coverage through their Overseas Student Travel Insurance Plan.

"Coverage under such plans," adds Bhargava, "is very extensive, as much to the extent of repatriation of remains (covers the funeral expenses or expenses of repatriating the remains back to India in case of death overseas)."

What if you are unable to pay back the loan?

Ravi Petkar, head of a leading financial counselling service at Pune, explains the steps you need to take if you are unable to pay back education loan EMIs.

"In such a situation, you can approach the manager of the branch that has granted the study loan and explain the situation in detail, explaining the reasons for your inability to repay the loan as per the original schedule," he says. He suggests that student needs to do his/her homework thoroughly and approach the bank with a comprehensive plan on when and how you intend to start repaying the loan.

According to him, banks are more likely to consider extending the moratorium period rather than accepting requests for reduction in the EMI amount or waiver of penal interest imposed, if any.

Go ahead and insure your education loan overseas

Broadly, students and parentsneed to understand the significance of taking insurance against a high value education loan. It is really not an option but a must. This will safeguard their family against any kind of acute financial crises in case of some unforeseen circumstances. In case of untimely death of student, dealing with a financial mess, in addition to losing their beloved one can be an insurmountable blow for the family.

Availing insurance linked to education loan

Normally banks that provide education loan have tie-ups with different insurance companies to cover education loan disbursed by them. For instance, Punjab National Bank has a tie-up with Kotak Mahindra Insurance to provide life insurance cover for education loan borrowers.

The insurance would cover study period as well as repayment period and in case of any mishap, the insurance company would take care of the loan repayment rather than the aggrieved parents. Insurance premium for student borrower is included in expenses covered for loan.

Similarly Dena Bank has also tied up with Life Insurance Corporation of India to offer life insurance cover to education loan borrowers through special schemes. Indian Bank, on the other hand has provided life insurance cover to the student borrowers under 'New IB Jeevan Vidya' Insurance Scheme.

In case of loans disbursed by HDFC Bank, HDFC ERGO General Insurance Company Ltd provides insurance protection.

What if insurance is not linked to education loan?

Alternately, students who avail education loans from banks who don't have insurance linked to it can look to buy a sufficient 'term plan' since insurance premium is very low at a young age. For instance, for a 25-year-old, buying Rs 25 lakh term plan for a 10 year period will cost close to Rs 4,500. So it can be a smart option for the education loan borrowers.

Important things that bank scrutinise before granting loan to students

• The repayment capacity of the student's parents/family/sponsor
• The value of collateral security; banks usually get the valuation of the collateral done from an approved evaluator and only then process the loan applications
• Margin money: Usually in case of overseas education loans the student's family contribute some margin money. Usually it is 25 per cent. For example if a student is applying for a Rs 20 lakh loan and the margin money is 25 per cent then Rs 5 lakh has to be contributed by student's family.

Important note

• Interest rates are subject to change from time to time
• Interest rates mentioned above are as on January 12, 2012
• Loan amount granted is generally up to Rs 20 lakh in case of studies abroad

It covers typically:

• Tuition fees payable to college/school
• Examination /library /hostel charges
• Travel expenses
• Purchase of books /equipment /uniform
• Cost of two-wheelers (optional)
• There can be additional processing fees, pre-payment penalty and other charges charged by banks