Will education loan interest subsidy reach students?

Sometime late last year, I got talking to a young man Ajay, who delivers milk to our house in the morning, when he had come to collect the monthly bill amount on a Sunday. Ajay was smart and ambitious and he told me that he had completed his graduation and just appeared for the MBA entrance exam.

So far he had financed his education by doing odd jobs since his parents barely managed to eke out a living running a small street side eatery joint. He was keen to do an MBA and was convinced he could crack the entrance exams. He was worried about how the course cost was going to be funded.

Even if he managed to get one of the cheaper course it would still cost anywhere around Rs 5 lakh. Luckily his parents realised the value of education and were willing to sell/pledge the family jewels but that would raise just around Rs 1.5 lakh or so.

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That's when I informed him about the education loan schemes devised by the PSU banks wherein education loans up to Rs 4 lakh were be available for courses like MBA from AICTE (All India Council of Technical Education) recognised institutes without the requirement of any collateral security.

His parent(s) would need to be co-borrowers but the fact that they had a low income would not have an impact on the loan sanction. Not just that, since he belonged to a family with income below Rs 4.5 lakh per year, the interest during the two-year course period would also be paid by the government as per the scheme that had been announced in the July 2009 budget.

Ajay went back a charged man and left me with a pleasant glow of having done my good deed for the day. He was back the next Sunday. The PSU bank he had spoken to asked him to come back after he cleared the MBA entrance exam and secured admission.

I asked him to wait for the results.

He came back a few months later. He had passed the exams and had secured admission in a decent management institute in Mumbai itself. Now he was frantically looking for the education loan.

He had approached 3 PSU banks and all of them were shunting him from one desk to another without giving any firm answer. Fortunately I knew a senior official in one of the banks. I spoke to him and gave the details of the case including the excellent academic credentials despite the economic background and managed to get the loan sanctioned for him reasonably quickly after that.

He profusely thanked me. He also told me that the bank had informed him that they had absolutely no idea about the interest subsidy scheme that he was talking about.

I told him to take the loan and that we would worry about the subsidy later.

The bank officials were right. The scheme had been announced in the last budget but no further action had been taken to activate the scheme.

This scheme is to provide interest subsidy to the students taking up education loan to pursue technical/professional education studies in India after class XII. This loan is only available to students whose total gross parental/family income from all sources is less than 4.5 lakh.

Under this scheme the interest for the entire moratorium period will be taken care by this scheme. Moratorium period means the course period plus one year or six months after getting job, whichever is earlier.

This scheme is applicable for all the loans which are disbursed from the academic year 2009-10 starting April 1, 2009.

This is an excellent scheme. To take a small example, let's take a student who is opting for a two-year MBA course. And we assume that the course fee is Rs 4 lakh and Rs 2 lakh is paid at the start of every year.

Keeping these assumptions in mind, the total interest accumulated in the loan account @ 11 per cent over a period of two years is approximately Rs 44,000.

This entire amount is paid to the bank by the government.

Over and above this, since this is treated as if the interest is paid during the course period, the bank offers a concession of one per cent and hence the interest rate becomes 10 per cent once you begin repayment. This brings down the EMI from Rs 6,849 to Rs 6,640 for a 7 year period.

Both are excellent benefits.

The HRD ministry has recently announced some guidelines for operationalising the scheme. Canara Bank has been appointed as the nodal bank under this scheme.

The HRD ministry is also going to announce the courses for which such subsidy will be available. This should anyway happen soon (or may already have been done).

The biggest challenge is that the family gross income will need to be certified by a public authority/ies, which is/are authorised by the respective state governments for this purpose. This scheme is based completely on economic background and not on social background (which normally are meant for SC/ST or OBC categories).

We were not able to get any information from the web or from the banks about which agency is exactly going to do this certification and what will be the basis.

Most state government agencies that certify incomes are basically geared to certify families below the poverty line or as economically weaker class where the definition of income is quite low. Gross family income of Rs 4.5 lakh is not exactly low by our standards and how these agencies are going to deal with this certification will need to be watched.

Meanwhile, not a single rupee will get disbursed under the scheme till such certification process falls into place.

Even if this excellent scheme is implemented well it will still leave the main issue unanswered. How will meritorious but not so well off  people like Ajay get the loan if the loan they require is above Rs 4 lakh (which requires the parents to have sufficient income to justify the loan or for provision of collateral).

If they don't get the loan at all what good will the subsidy do?