Of the various ways to raise the money, obtaining a student loan is the worst. It is far better to fund studies from your current income, or your savings, or, best of all, by obtaining a bursary or scholarship.
Not only is a loan more expensive, but it’s more onerous because of the contractual obligations that come with it.
There are two avenues open to prospective students in South Africa who need to borrow money for their education: the government-backed National Student Financial Aid Scheme (NSFAS) and a retail student loan through one of the “big four” banks: Absa, First National Bank (FNB), Nedbank and Standard Bank.
A big difference between the two, apart from qualification criteria, is that an NSFAS loan holds the student solely liable for the debt, whereas the banks insist on a parent or guardian of the student bearing ultimate responsibility for the debt.
The NSFAS programme is aimed at students from disadvantaged backgrounds and low-income families. It provides loans for study at any of the 25 public universities and technical vocational education and training (TVET) colleges in South Africa.
The loan includes money for tuition, campus or private accommodation, food, books and travel costs.
Students must apply for a NSFAS loan through the university or college that will host their studies. Each institution is allocated a certain amount of money for these loans, with the allocation formula taking into account its fees and the number of black, coloured and Indian students enrolled.
The institutions then apply the rules set down by the NSFAS to determine which students will be funded.
The scheme can accommodate only a limited number of students. “There are always more students applying for financial aid than the NSFAS can fund. Even though the budget for financial aid has increased significantly, there is still a massive shortfall,” the NSFAS website says.
Only students from households earning less than R122 000 a year are eligible. The actual amount of the loan is determined on a sliding scale. Students whose families can’t afford to pay anything towards their education receive full funding, which is up to R71 800 a year for a university degree.
Students must repay their loans when they finish studying and find a job. However, if the student passes all his or her required courses each year, up to 40 percent of the loan may be converted into a bursary, which does not have to be repaid.
Repayment of the loan begins once the student gets a full-time job and earns R30 000 or more a year. The repayment amount begins at three percent of gross annual salary, increasing to a maximum of eight percent once the annual salary reaches R59 300 or more.
For example, this means you will repay R900 on a salary of R30 000 a year, or R75 a month. Once your salary reaches R59 300, your repayment will be R4 744 a year, or R395 a month.
What the banks offer
Absa, FNB, Nedbank and Standard Bank all offer loan packages for students. The products for full-time students are structured so that the interest charges do not compound over the entire period of study, which could be four years or more.
This means that, although the capital may be repaid only once you have completed your studies, the interest on the loan and the loan administration fees must be serviced as you study.
This is done either by you, if you are earning an income, or by a sponsor (someone who takes responsibility for the loan, alternatively referred to as the principal debtor, guarantor or surety), such as a parent.
For example, a student is loaned R60 000 a year for four years, the interest rate is 10 percent and the administration costs are R50 a month.
Interest is therefore R6 000 and administration charges are R600 a year, which means an annual repayment by the sponsor of R6 600, or a monthly repayment of R550 in the first year.
In the second year, the interest, now on a loan of R120 000, will be R12 000, which, plus the administration charge, will mean a monthly payment by the sponsor of R1 050.
In the third year, on a loan now of R180 000, the sponsor will have to pay R1 550 a month, and in the fourth year, on a loan of R240 000, the sponsor will have a monthly payment of R2 050.
At the end of the study period, the student will owe a capital amount of R240 000, which, if paid off over time, will attract its own interest and administration charges.
If the interest is not paid and allowed to compound during the study period, the total amount owing by the end of the four years, excluding the administration charges over that time, would be about R330 500.
The loan packages offered by the banks have the following additional features in common:
• They finance one student per loan, covering tuition and accommodation expenses, as well as money for books and study-related equipment. The loans typically do not cover living expenses.
• Loans are granted for a specific year of study and students must re-apply for each year of registration.
• Fees may be paid directly to the educational institution and place of residence, with money for books or equipment paid into the student’s bank account. Typically, the banks offer a student transactional account with the loan, which may have features such as preferential rates. Alternatively, as in the case of Absa, all transactions are through the sponsor.
• Proof of identity, address, income (payslips and/or bank statements), acceptance or registration at the relevant tertiary institution and course fees, among other things, are needed on application.
• The banks usually require you or your sponsor, or both, to take out credit life assurance to cover the outstanding balance on your loan in the event of death, dread disease or disability.
• The course and institution you choose for your studies must be accredited by an authority such as the Department of Higher Education. You must be studying for a recognised certificate, diploma, degree or postgraduate degree or diploma.
• The bank will perform an affordability assessment of whoever is responsible for the loan, taking into account his or her income and credit record.
• A once-off initiation fee and a monthly service fee are charged on the loan.
• The bank needs to know how you are progressing with your studies, so you have to send proof of registration and the results you achieve in your courses.
• Full-time students must start repaying their capital on completion of their studies. The banks do offer a grace period, however, if you do not immediately find employment or have to complete your articles, internship or community service. Part-time students have to repay their loans while they are studying.
Absa study loans are usually opened in the name of a sponsor, who requests finance on behalf of a student. Loans can be from R15 000 to R250 000, although higher amounts are considered in exceptional cases.
Funds must be repaid between 12 and 60 months after your studies have been completed.
Absa offers discounts of up to 15 percent on study-related equipment.
You may opt to make capital and interest repayments as soon as your application is approved, or you may repay interest only for 12 months while studying full-time, and thereafter capital and interest.
When topping up an existing loan, you may repay interest only for a further 12 months. You or your sponsor must earn a monthly income of at least R3 000.
Rheka Ramcharan, the head of personal and business lending at Absa, says: “Our study loan product has also been designed to cater for difficulties a student may have in finding immediate employment in the job market after studying, and they are allowed to apply, on a case-by-case basis, for a repayment extension. On average, the annual loan requested is R55 000. The average duration of study is 35 months, with an average pay-back (post-study) period being between 40 and 45 months.”
Interest rate: all loans are at the prime rate.
Bank charges: R1 197 (including VAT) initiation fee (on first loan only) and R68.40 (including VAT) monthly administration fee.
All transactions are done through the sponsor (“principal debtor”), and the sponsor remains responsible for the loan, even once the student has finished studying and is employed.
At FNB you have access to loans between R4 000 and R80 000 per year of study. You must be over 18 years of age and your sponsor must be employed, with a minimum income of R6 000 a month.
The bank provides a six-month grace period on completion of studies to allow time for the student to find employment. Loans are repaid over a term of 60 months after completion of studies.
Interest rate: Corne Jordaan, the head of credit at FNB Personal Loans, says the interest rate is linked to prime and based on the risk profile of the sponsor and the nature of studies. Rates offered to FNB customers are between prime and prime plus six percentage points.
Bank charges: An initiation fee of R165 per credit agreement, plus 10 percent of the amount in excess of R1 000, but not exceeding R1 050 plus VAT, or R1 197.
The initiation fee is charged once; not repeated for subsequent years of study. The monthly administration fee on the loan is R68.40 (including VAT).
The bank says anyone of sound financial standing may stand as sponsor (“guarantor”) and all full-time students must be supported by a guarantor, who must also have his or her main transactional account with Nedbank.
The loan is taken out in the student’s name, and the student must open a Nedbank transactional account.
During the period of study the guarantor is expected to service the interest due on the loan, and once the student has graduated and is employed, the student repays the full amount over an agreed period (up to 18 months per year of study funded).
Interest rate: prime plus two percentage points.
Bank charges: R75 initiation fee and no monthly administration fee. There is a R65 initiation fee for subsequent years of study. (Charges exclude VAT.)
– MARTIN HESSE
[This article was first published in the 1st quarter 2017 edition of Personal Finance magazine.]