How should I choose a student loan?

2020-02-27 13:00

Xola writes:

I am thinking of applying for a student loan. What are the things I need to consider before and while applying?

City Press replies: 

The best student loan is one where you are only borrowing for a year at a time. In other words, you pay off the loan each year.

In some cases, banks will provide a longer-term loan, but parents have to sign surety and not everyone has a parent who is in a position to do so.

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

The one-year loan

Have a budget: Make sure you can afford the loan and that you 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 you are able to afford a new loan for the next 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. 

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. Most banks issue student loans at the prime interest rate.

A four-year loan

If you are considering taking out a longer-term student loan – in other words, you cannot pay it off over one year – then you usually need someone to sign surety, unless, as the student, you have an income. 

Both Absa and FNB enter into agreements with the parent or sponsor directly, and the loan is issued in terms of the principal debtor’s name.

The individual who signs the contract (applicant) remains fully liable for the repayment of the student loan. In cases where the student and the principal debtor are different people, the student is not liable for payments. 

Unfortunately, this means that the parent has to have a good credit record and can afford to repay the loan, although the same would apply for a personal loan.

Student loans are issued for each year of study, so you need to reapply for a loan each year. 

With a personal loan, the capital/principle debt and interest form part of the repayments from the first month and must be repaid based on the agreed time frame.

In the case of a student loan, only interest must be paid during the course of study and the repayments of the capital/principle debt must begin within six to 12 months of when you’e no longer studying. The loan must be fully paid within four to five years.

With a student loan, most banks offer a six-month grace period to find work, but this can be extended to up to 12 months as long as interest on the loan is serviced. 

If the student is required to complete articles, an internship programme or community service, proof of this must be supplied to the bank. During the period of internship, articles or community service, interest must be serviced on the loan.

A parent can decide whether you want to just pay the interest or whether you can repay both the interest and capital as per a personal loan.

According to Absa, the average annual loan requested is R55 000 and the average duration of study is 35 months, with an average payback (post-study) time of between 40 and 45 months.

Maya Fisher-French
Personal finance journalist
City Press
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March 29 2020