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High time for banks to rethink student loan models

Lest alternative finance fills the gap.
As universities across the country grapple with fee protests and the challenge of funding higher education, banks should reconsider their student lending models.

JOHANNESBURG – Banks are slow to change. And considering the red tape and rigmarole that comes with safeguarding other people’s money, one can understand why. Having said that, they aren’t too shoddy at rolling out new offerings to entice customers and grow revenue (think mobile banking and rewards programmes).

Surely it’s high time that they apply the same innovative approach to student loan models?

Of the country’s large consumer banks, including Absa, FNB, Nedbank and Standard Bank, only Standard Bank said it is looking at ways of “redesigning” its “traditional approach” in order to accommodate more students.

FNB said that the fee structure and product benefits on student loans have remained unchanged for the past number of years. “There are no immediate plans to revise interest rates on student loans, which are already more favourable than personal loans,” said Corne Jordaan, head of credit for personal loans.

Granted, many of the banks do already offer bursaries to underprivileged and academically talented students, but for the most part, student loans continue to be offered on fairly traditional terms: i.e. linked to prime (the rate charged to the most creditworthy customers, which increases as the repo rate goes up) with similar criteria applied across the board.

These loans, which generally cover fees, books and accommodation, are granted in the name of a surety (a parent, guardian or sponsor), who is responsible for servicing interest on the loan while the student is studying. Once the student completes his or her studies, there’s a six-month grace period before the bank expects said student to start repaying the full loan instalment: interest and capital. Student loans are repayable over a five-year term, which may be extended in some cases if the repo rate is hiked (and the prime rate bumped up as a result).

Banks don’t provide information specific to the size and performance of their student loan books, usually incorporating these numbers under ‘personal’ or ‘other’ loans. This is problematic for a number of reasons, not least because it hides how profitable (or not) these loans are for banks.

More favourable rates

All the banks state that student loans are offered at significantly more favourable rates than personal loans based on “individual risk profiles”, such as income, expenditure and credit history.

FNB’s rates vary from prime (currently at 9.5%) to prime +6% – meaning a high-risk borrower could be in for 15.5% per annum on a student loan. On a loan of R80 000 (FNB’s maximum), that’s an extra R12 400 per year on interest. Standard Bank also offers rates up to a maximum of prime +6%, setting rates largely according to the type of qualification and reducing them by 1% for every year of study passed.

Absa charges an average of prime +1.8%, at a variable interest rate. This translates into an average of 11.3% at the current prime rate.

Since these loans are based on the prime rate, which shifts in line with changes to the repo rate, they are subject to change (and likely increase in the current rising interest rate environment).

Naturally, the longer you take to pay off your loan (or the longer your degree is), the more you will pay in interest. “A four-year loan today would be settled in around ten years from the start of studying,” according to Vanesha Palani, head of transactional, forex and deposits at Nedbank. “At the average cost of R150 000, this would probably cost around R220 000 if the prime rate was used,” she says.

Capitec does not specifically provide student loans, but rather unsecured credit to those who are employed and can afford it, says spokesperson Charl Nel. While clients are asked to indicate why they require a loan, ‘education’ could refer to primary, high school or tertiary education, or even simply to the cost of living associated with education outside their hometown, Nel says.

Room to innovate?

Technology, big data and the power of digital means scope to dramatically reduce the costs of bricks-and-mortar banking while providing more granular data on customers, which enables banks to price more accurately (and often favourably) – or risk being displaced by new players altogether.

For example, data has enabled US-based lender, Earnest, to provide more personalised interest rates to borrowers than traditional lenders are able to. Earnest claims to save its clients an average $18 000 by consolidating and refinancing their student loans.

Peer-to-peer lending – which directly connects borrowers and lenders, promoting more affordable credit by cutting out costly intermediaries – is another innovative response to the costs associated with borrowing from a bank.

Indications are that banks are not yet thinking creatively enough about funding education. Roll on the digital disruptors of traditional financial services.

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in Australia – there is NO charge for any education – unless you go private. all degrees are “priced” and initially paid by the government. once the student starts earning over a certain amt (currently A$50,000 SAR500,000) is the loan repaid by 4% a year added onto one’s tax bill.

Robert, sorry but that is not no charge. It is a deferred loan. And no different than the bank approach apart from the interest rate, and earnings thresold.

Well this is not bloody Australia is it?

A student loan is the most expensive form of financing, rather use your bond.

Even better is to start a separate Unit Trust when your child is born and contribute a modest affordable monthly amount over 18 years. Then when your child gets to high school look at what the fees for Varsity are and adjust your contributions to ensure there will be enough for a 4 year degree, accommodation, books etc. All it takes is a bit of sacrifice and its very manageable.

Probably the biggest factor behind bank’s reluctance to fund students is our unemployment rate.
Too many of our graduates end up either unemployed, under-employed or unemployable, and that’s one of the underpinnings of NSFAS’s struggles, people are just not able to pay them back.

So in essence, you are asking the financial institutions, that are businesses in it to make a profit at the end of the day, to take a giant leap of faith based on sentiment rather commercial viability, which is just not likely to happen.

Agreed. The universities are producing thousands of graduates with BA degrees in political science, philosophy and sociology etc and I really can’t see how this will contribute to the economy. In the end, some may still find employment in government which in itself is nothing other than sheltered employment funded by the taxpayer. More passengers on the gravy train. Studying for the sake of studying means nothing.

Unfortunately legislation (such as NCA) will render innovation such as the peer-to-peer lending as mentioned in the article impossible.

Yep it is all the banks fault………………..again. LOL.

End of comments.

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