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Student Loans Interest Rates To Rise From 1st June Onwards.

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There might be increase in Interest Rates of Student Loans from July 1, 2013 Onwards. This year applying for an education loan might turn out to be very difficult for students.

A 2007 law cut interest rates, from 6.8 percent to 3.4 percent, for subsidized Stafford Loans issued to undergraduates by the federal government. Last summer, Congress enacted a one-year extension after persistent campaigning by President Barack Obama to keep the interest rates low.

That extension expires June 30, and an estimated 7.4 million students will pay more for their student loans if rates go up, according to the White House. However, each year the lower interest rate is extended represents $6 billion in lost potential revenue.

Hence, students applying for Student Loans from July 1, 2013 shall be facing the hike in interest rates. A source has revealed that Federal student loans will get more expensive for students going to college in the fall unless Congress acts by June 30.

Educational loans are new in India: after the launch in 2001-02, banks started focusing on education loans from 2005. The Government of India, in consultation with Reserve Bank of India (RBI) and Indian Bankers' Association (IBA) had framed an educational loan scheme to ensure that no deserving student is deprived of higher education for want of finances. The loans cover all type of courses, including professional courses in schools and colleges, in India and abroad.

Increase In Interest Rates of Student Loans

Data released by Reserve Bank of India (RBI) recently shows that outstanding educational loans has zoomed from Rs 2,986 crore in 2003 to over Rs 48,400 crore in 2012.  Public sector banks account for over 90% of the loans disbursed in 2012: Rs 46,740 crore.

Increase In Interest Rates of Student Loans

The data also shows that the number of accounts has been rising sharply. The number of educational loan accounts has zoomed from just 249,000 accounts in 2003to 2,481,000 accounts in 2012.

Increase In Interest Rates of Student Loans

In his recent budget proposal, President Barack Obama suggested tying student loan rates to market interest rates.

Increase In Interest Rates of Student Loans

Under Obama's proposal, interest rates would be 2.8 percent on subsidized student loans, 4.8 percent on unsubsidized students loans and 5.8 percent on graduate student loans.

This year, it is likely to increase from from 3.4 percent to 6.8 percent. In India, accessing the education, particularly the higher education is a major challenge. What may be the result of this hike? Millions of students who dream of studying abroad and plan higher education via Education Loans may lose their hope.

In-turn this may also affect the number of students traveling abroad for higher education. In today's generation, when more students prefer studying an Undergraduate or a post graduate abroad, the increase in interests may act like an obstacle to apply for abroad universities.

An official of UGC University Grants Commission says the scheme envisages loans up to Rs 7.5 lakh for studies in India and up to Rs 15 lakh for studies abroad. Leading banks like State Bank of India offer loans up to Rs 30 lakh for studying abroad. The current interest rate on loans is around 11.45%-13% per annum.

"Right now, we are kind of at historic lows in terms of our interest rates being very low, so right now it would be a benefit to the students, but in three or four years, when the interest rate changes nationally, (it may not be)," said Dan Mann, director of financial aid.

"If we go strictly to a variable interest rate, is there a possibility that it would always just be a variable interest rate, or should there be a cap put on at some point? Those are the questions that are being asked and debated at this point," he added.

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