Student loans: the devil is in the detail, so get expert advice

The Sowetan, 28 January 2003

Students who intend financing their studies with bank loans are being urged to explore a range of product options before selecting one.

South African Banking Adjudicator advocate Neville Melville is worried that many young people are to hasty when applying for student loans, with few taking sufficient time to understand the impact of the agreements on their pockets.

Some packages allow students to elect when they will start repaying the debt. For example, a student who registers for a three year BA degree now may opt to make the first instalment in 2006, when they expect to formally enter the job market.

Neville says while this might seem like a great deal, offering full time learners tremendous flexibility, it is imperative that students grasp the full extent of the commitment being made.

By engaging his bank, the student should find out what he or she will owe at the end of his studies. "By virtue of the fact that all financial institutions are entitled to charge interest on money lent, it is possible that the student will be presented with a bill for more than double the amount initially borrowed.

"Like a taxi, with a meter that keeps on running in traffic jams, interest builds up, with the end figure potentially being a huge one." says the banking adjudicator.

Last year, Melville said his office considered the in duplum rule, derived from Roman Dutch Law.

Simply put, the rule prevents a lender, in this case the bank, from claiming more outstanding interest than the amount of capital owed.

In this particular case, a student stopped paying the interest due on her study loan one year after starting university, and was eventually confronted with a significant bill.

"Based on legal precedent" says Melville, "the office ruled in favour of the bank, concluding that the in duplum rule did not prevent the bank from demanding interest that exceed the original capital."

This meant that the student ended up paying more than double what she borrowed in the first place!

Before signing on the dotted line, Melville suggests that students do the following:

• grasp the repercussions of increase in the prime lending rate on their obligations to the bank;
• the type of charges that will be debited to their accounts, their range and frequency;
• different payment options; and
• the benefits of early settlement.

Remember, that the Code of Banking Practice, which should be available at the local branch of your bank, requires every bank to assist customers in understanding the financial implications of the various loan products.

The Banking Adjudicator's office strongly advices students to seek the necessary advice, and clearly understand it, before signing any agreement they may later find was not what they had expected.

For further information or clarity, the Banking Adjudicator's Office can be reached on 011-838-0035.