Make sure your student loan remains manageable

2013-11-06 00:00

IN an ideal world, one would have saved enough to pay for one’s studies, but this is seldom the case and most students need to consider taking a loan.

Borrowing money to study is one of the “good” debts because it delivers a return on investment. Within two years of gaining work experience, a graduate earns double the salary of a matriculant with five years’ work experience, according to Advtech.

But even good debt can become bad debt if not managed correctly. In the U.S. student loans have become one of the biggest causes of indebtedness, with the average amount owed on a student loan a massive $25 250 (R220 000) in 2010.

One way to avoid entering a debt trap is to borrow and repay your student loan over one year, argues David Scholtz of Eduloan, a finance company that provides loans to students.

He says it is sometimes difficult to repay a loan over one year as credit providers look at the borrower’s ability to repay the loan as they have to be mindful of not overextending the borrower.

This means that as a student, you may need to work part-time or study part-time so that you can afford to repay the loan, otherwise you will accumulate significant debts that will hamper your ability to build wealth once you start working. If you attend an on-campus university you can expect to pay about R30 000 in tuition fees. If you take out a student loan for fees for a three-year degree, you will leave university with a debt of about R120 000.

If you pay off that loan over five years, you will have payments of about R2 500 per month. That will make a big difference to your ability to buy a car or a house, or to start saving to create wealth.

Scholtz says that educational debt gives you the opportunity to invest in your own or your children’s education and will go a long way to setting up the foundation for a debt-free future.

• Make sure you budget properly before taking out the loan.

Scholtz says that before taking out a student loan, make sure you can afford it, and that you still have some money left over for emergencies.

• Plan for the full course.

By taking out a loan over one year and repaying it during the year, you can ensure that you are able to afford a new loan for the following year of study. There is no point taking out a loan for one year of study that you do not repay, only to discover that you cannot afford to borrow for the following year.

In some cases, banks offer student loans where the parents have to sign surety. The parents pay the interest for the duration of the studies until the student starts working and then the student is liable for repaying both capital and interest. However, not everyone has a parent who is in a position to sign surety.

A significant portion of the loans Eduloan provides are for less than one year. Scholtz says that lately they have seen that due to the rise in tuition fees and based on affordability, loan terms have to be extended.

• Understand the full cost of the loan, not just the monthly instalment.

Loans come with a whole list of costs such as initiation fees, administration fees and service fees. So although the interest rate may seem reasonable, the all- in cost is much higher.

Scholtz says that for example, Eduloan offers loans in certain circumstances at prime plus one percent (9,5%), but when they quote the student, they include all costs, including the effective interest rate, which is between 18% to 20%. In other words, your loan will cost you 20% more than the initial capital.

You do not have to take out credit life cover if you are already insured. Many credit providers make up for lower interest rates by insisting you take out credit life cover. This can be expensive and should not be required if there aren’t any benefits for the borrower.

• Beware of debt consolidation.

Debt consolidation is becoming an increasingly popular way for consumers to settle numerous debts, but Scholtz warns that your student loan should not form part of this consolidation.

Eduloan’s loans are offered on far lower interest rates and lower fees, so incorporating the student loan into a single loan facility could actually increase your loan costs. Rather speak to your credit provider about extending the student loan repayment.

• Don’t lie about studying.

Some people lie on their student loan applications as they do not intend to use the loan for studies, but this is not a good strategy. For example, FNB has a date stipulated on every customer contract by which time the bank must receive the proof of registration.

Failure to provide this results in the conversion of the loan to capital plus interest repayment, as well as an increase to the interest rate up to the maximum permitted by the NCA.

• Financial aid.

For students who do not financially qualify for a normal student loan, support is available through the government-backed National Student Financial Aid Scheme (NSFAS).

The NSFAS offers study loans at a very low interest rate, generally equal to the rate of inflation plus two percent. The two percent above inflation contributes towards the administration costs and any shortfalls, which allows the NSFAS to be viable.

The NSFAS grants loans without the need for guarantees or sureties, and if the student’s academic results are especially good, a portion of the loan can be converted to a bursary.

Up to 40% of the loan can be converted into a bursary, and doesn’t need to be repaid, depending on year-end results, which are re-evaluated every year after the first year.

Your payments start at three percent of your annual salary, increasing to eight percent when your salary reaches R59 300 per year or more.

• Bursaries.

Most universities offer bursaries or grants to students who have excelled in their previous studies, or on the sports field. Check with your university’s financial aid office whether you are eligible for any of these bursaries or awards.

Many South African companies, as well as provincial government departments, offer bursaries to promising students. The terms of these bursaries vary.

Contract bursaries require you to “pay back” the bursary by working at the company once you’ve completed your degree — giving you a job and work experience immediately after your graduation.

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