The new academic year has arrived for tertiary students, and with it come the ever more ominous sounds of a university system about to break at its financial seams. Universities are threatening to bar students with unpaid debts, while student leaders in turn promise mass action.
Competition is fierce for bursaries, scholarships and sponsorships, many of which tend to be offered only for certain degrees. So, barring sudden windfalls, and given that many parents did not or could not start saving for university when their child was born, paying for tertiary education tends to mean borrowing from commercial banks.
In theory, banks worldwide like lending to students – it offers a way of catching potentially high-earning future clients at an early stage. But banks do not like supporting students, or anyone else, if it’s too costly or risky.
Many of the conditions of commercial bank loans are dictated by the perceived risk a student represents. Probably the biggest safety factor for banks, and the most difficult hurdle for many students, is the need to find a guarantor who will pay off the loan if you default. Usually this is a parent, but banks say they are prepared to consider anyone who has the necessary credit record and financial backing
Students are expected to make some contribution towards their tertiary education, so student loans are generally only expected to cover tuition and actual university costs, as opposed to housing and other living expenses.
Typically, the capital loan for a full-time student is payable over the same number of years as the student’s course, with a breathing period after graduation before repayments commence.
The interest rate you pay depends on a number of factors which vary from bank to bank. Your interest rates could be adjusted upwards if you fail a year, or come down if you do well. Some banks vary their charges according to the degree chosen. Medical students, who are more likely to get a job and therefore be able to repay their loans (assuming they don’t emigrate), can receive lower interest rates than BA students.
These conditions help banks keep their risks down. Absa national student marketing manager Deon van Zyl says the default rate on student loans is “very, very low”. Absa claims to be the leader in terms of student loans with about 34% of market share.
The most important thing is to shop around before signing on the dotted line for a student loan. One bank may reject you, but another may not – sometimes even different branches can make different decisions. And be prepared to argue on costs, since there can be a lot of flexibility.
One MBA student with a year of post-graduate law and an honours degree in engineering under his belt was offered a 22% interest rate by his bank, which regarded the money as a personal loan. He moved to another bank which offered him 10%. The new institution is reaping the benefits as he climbs the career ladder, collecting an overdraft, housing bond, car loan …
Unfortunately, no sooner have you got your hands on the money than, more often than not, you have to start paying it back by servicing your interest repayments. Standard Bank has recently moved on to this system, rather than adding the interest to the loan amount.
Marketing officer Peta-Jean Fellows says this is “good for the banks and for the student”. It reduces the debts faced by new graduates and ensures the bank starts getting some money back immediately.
If you get turned down for a commercial bank loan, ask why. Van Zyl says one failure of the present system is that loan applications are often rejected without a reason being given. Applicants need to be advised on, and taught how, they can change the decision, he says.
The most important way of changing a rejection is to build up a credit record if possible. Working for a year or two, preferably saving regularly, is likely to help convince a bank you are a safer bet. Also try negotiating with your bank; if you can’t get a guarantor, it may be possible for two or more people to jointly underwrite your loan.
Studying part-time can be another option, although this has its own problems – part- time students are sometimes required to start loan repayments immediately.
Finding finance can be even harder for students wanting to study at institutions not recognised by the banks, such as vocational training at a private college. Standard Bank suggests such students look at alternative means of financing: overdrafts, revolving credit plans, or use of a credit card.
Van Zyl says the student-loan system is likely to evolve owing to the pressures facing tertiary education and the impact of private educational institutions.
Absa, for example, is looking at agreements where universities and technikons will stand surety for student loans. This will reduce the bank’s risks – and hopefully its charges – by allowing continual monitoring of students’ progress. It will also help banks to ensure that student loans are not diverted to other purposes, such as paying off higher-interest debts.
If you cannot acquire a commercial bank loan because you can’t provide a guarantor, one alternative is to get a loan via the Tertiary Education Fund of South Africa (Tefsa).
This year Tefsa awards vary from R990 to R12 100, with interest starting to accrue from the beginning of April. Academically successful students may have up to 40% of their loan written off as a bursary. In such cases, the interest on that part of the loan is written off.