Thursday, September 09, 2010

Find your way out of a student loan default

Ravi Krishnan (name changed) was very happy when he secured admission for an MBA programme in a reputed institute two years ago. He was pleasantly surprised when a bank provided an easy student loan as part of its campus lending programme. However, what he and his batchmates had not imagined was they would almost default on these loans. Just as they were completing their course, the global economic crisis was looming 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. They couldn't start repaying the bank immediately as per the loan repayment schedule.

The story will explain the reason behind rising defaults in student loans. We have seen students studying in secondrung B-schools, which do not offer quality placements, struggling to service loans when they do not have any source of income, explains V.N. Kulkarni, Chief Counsellor with the Bank of India-backed Abhay Credit Counselling Centre. The same is the case with students who discover much later that their institute is not recognized by the All India Council for Technical Education (AICTE). They are left in the lurch with slim chances of securing employment.

Rising Defaults
Of late, the education loan portfolio has been in the news for rising defaults, especially in the under-Rs. 400,000 category, where loans are sanctioned sans any collateral. In June 2009, many public sector banks, chief lenders in this category, under the Indian Banks Association (IBA) banner, came up with a distress alleviation measure to help students who couldn't secure a huge pay cheque. The member banks arrived at a consensus to consider genuine requests from students and extend relief on a case-to-case basis, depending on the merits of the rescheduling application. The respite would be in the form of extending the moratorium period to two years from six months/one year under ordinary conditions.

Approach the Bank
If you find yourself in a similar situation, you can approach the manager of the branch that has granted the study loan. There is no prescribed format for submitting such a proposal. The success of your endeavour depends entirely on your negotiation skills and how genuine your problem is. You should explain the situation in detail, explaining the reasons for your inability to repay the loan as per the original schedule. You need to do your homework thoroughly and approach the bank with a comprehensive plan on when and how you intend to start repaying the loan.

Remember, a sincere assessment and genuine intent hold key to convincing the bank on the restructuring proposal. Since banks would have already waited till the completion of your course and the expiry of the moratorium period, they wouldn't want to offer any concessions in terms of the amount payable. If your branch manager does not give a positive response, you can get in touch with the zonal manager or regional manager or the circle officer. 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. You should bear in mind that it is not binding on the bank to accept your proposal. It is completely at the bank's discretion, points out Madan Mohan, Chief Counsellor with the ICICI Bank-supported Disha Financial Counselling.

Seek Professional Help
If you are not confident about your abilities to convince the bank about your plight, you can always enlist the help of professionals in the field. The focus of credit counselling centres is primarily on credit cards and personal loans, but you could try asking for advice. "To date, we have counselled people who have been reeling under the debt burden, with education loans being a part of it. We've had parents who are often the guarantors in case of such loans coming to us for counselling. We have not seen student borrowers approaching us for advice; however, if they do, we can offer our guidance in terms of points to be covered in the communication to the bank and the right person to be contacted", says Mr. Kulkarni.

Cover all your bases
If your bank gives a nod to rescheduling your loan, make sure you don't squander the opportunity. Make sure you use the additional time available to make arrangements for repayment when it becomes due as per the revised schedule. You also need to have a back-up plan ready if your job hunt does not reach its logical conclusion when the deferred deadline ends. Save as much as you can and talk to friends and relatives to find out if they can bail you out for a while.

Source: The Economic Times, September 9, 2010
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