Borrowing to study

It is that time of year when many students will be selecting their courses for the year. In an ideal world one would have saved enough to pay for one’s studies, but unfortunately 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 US 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 according to the Institute for College Access & Success.

The only 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. This means 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 which will hamper your ability to build wealth once you start working.

For example if you attend an on campus university you can expect to pay around R30 000 in tuition fees. If you take out a student loan to pay for fees for a three year degree you will leave university with a debt of around R120 000. If you pay off that loan over the next five years you will have payments of around R2500 per month. That will make a significant difference to your ability to buy a car or a house or to start saving to create wealth.

Beware the pitfalls of study loans

Make sure you budget properly before taking out the loan. Scholtz says before taking out a student loan make sure you can afford the loan 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 will provide a longer term loans but the parents have to sign surety and not everyone has a parent who is in a position to do so. Eduloan only provides one year loans although Scholtz says if a student runs into financial difficulty the loan can be restructured.

Understand the full cost of the loan, not just the monthly instalment. Loans come with a whole list of costs such as initiation fees, admin fees and service fees. So although the interest rate may seem reasonable, the all- in cost is much higher. Schloltz says for example that Eduloan offers loans at prime plus 1% (9.5%) but when they quote the student they include all costs to reflect that the actual loan cost over the period is around 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. Many credit providers make up for lower interest rates by insisting that you take out credit life cover. This can be expensive and should not be required.

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. Typically student 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, this however is not a good strategy. For example FNB has a date is stipulated on every customer contract by which time the bank must receive the proof of registration. Failure to provide this proof results in the immediate 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 2%. The 2% above inflation contributes towards the administration costs and any shortfalls, which allows the NSFAS to be viable.

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 could 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 of tertiary study.

The repayment plan is reasonable and is based on earnings. Repayments of the study loan are based on the salary earned; starting only once your salary is R30 000 or more per year. Your payments start at 3% of your annual salary, increasing to a maximum of 8% when your salary reaches R59 300 per year or more. All repaid student loans are recycled to fund more needy students.

Contact the NSFAS Call Centre on 021 763 3232 for more information. Applications are made through the institution where you will be studying.

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, and make sure that you apply before the closing date, which is usually in October of the year preceding the start of your studies. Some can be as early as March, so it’s worth checking the date.

Many South African companies as well as provincial government departments offer bursaries to promising students. The terms of these bursaries vary tremendously. 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. Many mining and engineering companies, in particular, provide contract bursaries. A booklet known as the Bursary Register is published every year and includes a full list of bursaries available in your particular field. While copies are available at most high schools and at your university’s financial aid office, you can also order a copy from The Bursary Register (Tel: 011 672 6559). You can also obtain information on company bursaries on http://www.gostudy.mobi/bursaries/all/default.aspx.

-Information supplied by www.southafrica.info

This article first appeared in City Press

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