It pays to get insurance cover for education loan

Parents would do well to do a ‘forensic audit’ of all paperwork while going in for educational loan for their children, including the assumed insurance cover generated. This cannot be truer in the case of financially weaker families, says S Dheenadhayalan, an RTI activist, while recounting an incident in Coimbatore.

Banks reckon that while disbursing the loan they have insured the student, a matter of discretion, to mitigate risks from his/her accidental demise. The premium is part of cost overheads and debited to the loan account.

Should the bank fail to do this inadvertently or otherwise, parents as guarantors would be asked to repay the loan lumpsum.

Dheenadhayalan cited the case of M Mohanraj, son of Marimuthu, a small-time salesman, and resident of town Omalur in Salem district of Tamil Nadu.

Mohanraj had taken a loan from Indian Overseas Bank in November 2011 to pursue an MBA course. He died of brain tumour in May 2013 after receiving fees for two semesters (₹86,776) as loan.

Marimuthu wrote to the bank conveying the development, annexing a death certificate and medical records. He also sought a waiver of the loan.

But he had failed to get an acknowledgment for the same, a costly miss. The bank is now demanding repayment of the loan disbursed plus accrued interest of ₹1,02,412 (as on October 20, 2014). Marimuthu contacted higher authorities of the bank for remedy but he was told that it had no information about the death or any record or evidence of such information. He was earlier told by branch officials that the claim for waiver was invalid since the insurance policy was generated after his son’s death (on June 18, 2013, as per the loan statement generated by the bank).

Prevalence of an insurance policy would have exonerated him from repayment, Dheenadayalan said. In the absence of one, the bank is pressing for recovery of 75 per cent of the dues in the latest offer of a one-time settlement. The legal opinion that he received tended to favour the bank since the insurance policy is purely an additional precaution/security to the loan disbursal contract.

In the eyes of the law, banks are well within their discretionary limits to trigger an insurance policy in the name of a student drawing the loan.

Message for the public: ensure prevalence of relevant insurance policy as part of an education loan; and check appropriateness of entries in the insurance policy since banks tend to fill them casually with alphanumeric entries.

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