Opponents of student loans these days argue that these loans merely serve as a bankruptcy tool and can provide no value addition.
While I agree with their argument that given the extremely high cost of education, one should think multiple times about one’s decision, I disagree to a large extent with their underlying tone. They seem to put a large part of the blame on the banks. In this article, my aim is to provide the banks’ perspective. Even though I used to work in a bank which did not provide student loans, I have some working knowledge about asset products in general.
One should understand that student loan without any collateral is nothing but a personal loan. When a customer defaults on a housing or car loan, as a last resort, the bank can seize the underlying property (i.e. the car or the house) and sell it off to recover the money. This is why the interest rates for such products are low. In case of loans without collateral, such as student loans and personal loans, the person’s promise of payment is the collateral. Neither promises (nor people making such false promises) can be seized and sold. At best, the bank can sue the person. The bank then needs to write down the entire outstanding amount (i.e. put the amount as a loss in the balance sheet).
One should to appreciate the fact that the bank is taking a big risk in providing the money and that is why the interest rate is higher. In fact, many students just disappear after completing their education increasing the risk index of student loans. So, the student population is equally at fault for such high interest rates.
Personally, I had a very good experience with the Scholar loan product of SBI. I had only a week to pay my fees after getting an admit. I approached the bank and explained my situation. The loan processing was so quick that I had the demand draft for my fees in my hand by the day I applied for the loan. But again, I did my MBA when the total fee was half of what it is now.
So, just to reiterate, think well before you decide to do your MBA. Once you have decided, student loans can ease the financial burden that your education can put on you and your family.
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