South African banks offer what are known as student loans that differ in some key ways from personal loans.
It can be worthwhile making use of these loans to fund your studies or those of a student you are sponsoring, as the amount you need to pay while studying can be minimised. However, you should always bear in mind that carrying a loan for longer comes at a cost.
Student loans are designed to allow you to repay only the interest and charges on the loan until you, or the student you are sponsoring, complete the qualification. Then, often after a grace period that allows you, or the student, time to find a job, you start to repay the capital amount you borrowed.
In this way a student loan differs from a personal loan which requires repayments that start immediately. If you are employed and sponsoring a student, you can start repaying the capital on the loan immediately should you choose to do so.
Loans are often offered for just 12 months. In this case, should your studies continue over multiple years, you need to apply again for funding for your subsequent years of study.
You will only know if you will be able to get funding in your subsequent years when you apply in the subsequent year. If you make the required payments on the loan, have a good credit report and can afford the repayments, you can improve your chances of getting funding for subsequent years.
When you or the student finish studying, or if you give up your studies or default on the terms of the loan, you need to repay the amount you borrowed. The repayments will generally be structured over four or five years.
Some providers offer a grace period of between six and 12 months before you need to start repaying the loan to give the student time to find employment.
Some credit providers only allow students to take out student loans. Others allow either the student or someone sponsoring the student, such as a parent, to take out the loan. The person in whose name the loan is taken out is known as the principal debtor.
Whoever takes out the loan needs to provide proof of income and complete an affordability assessment to ensure the loan repayments are affordable. Their credit report held with the credit bureaux will be checked.
If a student takes out the loan and is not earning an income, they are likely to need someone, such as a parent, to stand surety for, or guarantee the repayment of, the loan. The parent or sponsor has to sign a contract agreeing to repay the loan if the student fails to do so.
In this case the student signs the loan agreement, the sponsor signs the surety agreement and the affordability assessment is performed on the person signing the surety agreement.
At least one local bank offers a student loan without surety for students doing select courses at specified educational institutions in the fields of science, technology, engineering, mathematics and health sciences.
Student loans require you to repay only the interest and charges on your loan while you are studying, making the loan much more affordable while you are studying.
Repaying the interest and the charges prevents the interest compounding against you while you are studying. At the end of your studies, the full amount you borrowed will still be outstanding unless you can afford to repay some of it while you are studying.
Delaying the repayment of the amount you borrowed means you will pay interest on the loan for a longer period of time than if you had started to repay it from the day you took it out.
Student loans are personal loans, which means the lender can charge as much as the repo rate plus 21% in interest.
However, student loans are typically offered at lower interest rates. Interest rates start at the prime rate less 0.5 percentage points. The rate you, as the principal debtor, qualify for depends on your credit profile – your credit report, how much you are borrowing, what you earn and the assessment of how much you can afford to repay given your financial obligations.
The interest rate is likely to be based on the prime rate and variable, which means it will move up or down with interest rates. However, at least one bank offers a fixed rate for the term of the loan.
If you take out a student loan in your own name while you are studying, your repayment history will build your credit record. If you diligently repay the loan, you will be in a good position to take out credit to, for example, buy a car or a home when you have finished repaying the student loan. However, always remember it will cost you in interest, so it is best to borrow as little as you can.
Loans may only be approved for study at recognised tertiary education institutions, for example, those that meet the South African Qualifications Authority; Sector Education Training Authority; Department of Higher Education and statutory qualification monitoring body, Umalusi, requirements or are South African Civil Aviation Authority approved Flight Schools.
Foreign institutions may or may not be included.
The principal debtor may need a minimum income and a South African ID. The minimum income may be higher for students studying part time than for a parent or sponsor.
Credit life cover or insurance pays off the loan in the event of death or permanent disability of the principal debtor. It may cover the repayments in the event of temporary disability.
Credit life insurance may be optional or compulsory for a student loan unless the principal debtor can provide their own suitable credit life insurance policy if they wish to use their own.
The cost of the credit life insurance will need to be paid monthly from the inception of the loan.
Some student loans have an overall limit on how much you can borrow.
Some have individual limits for tuition, accommodation, books and equipment and historical debt.
This depends on the credit provider. Some prefer to pay the educational institution and where applicable, the accommodation provider, others pay the money into the principal debtor’s account so that it can be used not only for fees for the qualification but also accommodation, food, books and other material or equipment, such as a laptop, required for the course.
If you get a scholarship or bursary after you have taken out a loan, or if you find part-time employment, you can repay or even settle the loan early. The credit provider may or may not charge you an early settlement fee.
Gavyn Letley, product head at FNB Loans and Tshiamo Molanda, head, youth & mass market clients at Standard Bank SA assisted with information for this article.
