Should I Guarantee My Sons Education Loan
Should I let my son go for an MBA overseas?
This innocuous little question on Apnapaisa Ask the expert section caught my attention.
Why this question?
Which father would not want to let his son do an MBA overseas? I questioned myself.
To look answers for our ( His & Mine)
questions, I decided to dig a little further to find out what was the dilemma about.
Let me share the dilemma and the solution here:
The reader Dinesh Sehgal (name changed) was in his early 50s and was working as a mid-level officer in a Public Sector Undertaking (PSU) in Delhi. He had married off his two daughters and his only son was an engineer and working with a Delhi based Software Company. The expenses incurred on bringing up his children and their education and marriage and his own modest income (Rs. 7 lacs per annum net of taxes) meant that he had no significant investments/savings. He had his own house (worth around Rs. 55 lacs) though with a home loan of Rs. 18 lacs still outstanding on it.
His son wanted to do an MBA in Australia, which would cost him around Rs. 20 lacs. His son had savings of around Rs. 5 lacs and was looking for an education loan of around Rs. 15 lacs. A PSU bank had also agreed to provide this,loan,but required Dinesh to be a guarantor as well as to provide the house as a collateral security for the education loan. The PSU bank was prepared to take over the existing home loan as well from the existing lender.
If it was all set, then what was the problem?
Clearly Dinesh was having second thoughts. His only serious asset was the house and he was worried about loosing his house in case the son was not able to repay the loan for any reason. An unstated concern was perhaps whether his son would be responsible enough to pay of the education loan or leave him holding the can after completing the course and starting of his career. At the same time he badly wanted his son to get the additional qualifications so that he could progress in his career.
A real dilemma, this
Even this left me perplexed, like what to advice him? As a fellow Indian I understood Dinesh’s desire to do the best for his son. At the same time as a Financial Planning professional it was clearly not advisable to expose your only financial asset to the risk in such a manner.
I must confess, I was a bit confused. After lot of discussions with our financial planning team (all of whom are much younger with only one of them having a child aged 7 years – and hence not really in a position to empathise with Dinesh’s dilemma) I gave worked out a typical Indian style compromise solution.
My first question to Dinesh Are you prepared to borrow money against the security of your house to lend to your son for the purpose of his higher education?
His reply was, If I could be reasonably sure that my son would pay it back.
My next question – Under what circumstances did you expect your son not to repay the loan?
He mentioned the following reasons:
He will fail in the course given his brilliant academic track record so far this was unlikely
He will fall sick or have an accident preventing him from completing the course this is an insurable risk and should be covered by,Insurance
He will complete the course but not be able to get a job given his background this position at worst can only be temporary
He will get a job but due to other responsibilities (marriage, job overseas, etc) neglect to repay this liability.
The last point was the real concern area. Normally, I told Dinesh, you depend on our culture and traditions to make sure that the son will pay for the father’s debts. (read the story in DNA dated November 21).
Analysing his state of mind, I advised that in your case the debt was really taken by your son himself and only guaranteed by you. A good compromise option would be to draw up a legal document between you and your son making it clear that whilst both are joint borrowers on the bank’s records, the loan has been taken for the purpose of the son and as between themselves he is fully liable to repay the loan. This document along with the normal social pressure that exists in our society should be a reasonable safeguard against the son neglecting to pay back the education loan even though being capable of paying of.
Dinesh has not got back to me on this and I am not aware whether he actually followed my advice. Could there have been a better advice in such a situation?
I invite the views of all you readers on Dinesh’s dilemma.