Monday, 27 June 2022

Traditional educational loans aren’t cutting it for parents looking for K-12 financing options

Education financing sounds good in theory — but tuition loans fall short in practice: The desire for prestigious, high-quality education means that demand for enrollment in private, international schools — which are not particularly cheap to attend — is growing here in Egypt. There are at least 2.5 mn children (around 10.6% of our total student population) enrolled in private schools, according to figures cited in a recent Colliers report (pdf). But with rising inflation, private school tuition has been on the rise, making it increasingly expensive to finance a child’s K-12 education. Could education loans help?

As was the case back in 2020, K-12 education loans have not really picked up among parents, although the banking sector has been working to make loans more attractive. Banks are still trying to get creative with their offerings and tap into new pockets of demand — but many parents we spoke to maintain that traditional financing options available to them are simply not attractive enough, whether due to high interest rates or short tenors.

Private K-12 education is not a cheap endeavor: Parents should have at least EGP 769k on hand for the entire duration of their kids’ private school education, according to a recent study by EdArabia, which found that international schools can cost up to a total of EGP 3 mn per child. “The biggest bulk of my annual income goes to my kids’ school,” Omar Ayman, a father and an engineer at a construction company admitted. Tuition fees for his two sons for their current school year cost around EGP 188k per child.

There are plenty of tuition loan options in the country: The majority of Egypt’s 39 banks offer products to facilitate tuition payments, according to our survey, from private banking players like HSBC and CIB, to state-owned institutions like Banque du Caire and United Bank.

By the numbers: Education loan amounts typically range between EGP 2k to 1.5 mn, depending on the bank, according to customer service agents we spoke with. The average loan tenor is around a year, though state-owned Banque Misr allows the loan to be repaid over up to 84 months — the longest time period we’ve come across.

The average interest rate for education loans is around 18%, with many maintaining that interest rates can vary on an individual basis, mostly based on the borrower’s income and creditworthiness, as well as the loan amount and tenor. CIB offers education loans at an average of 15-17.5% while the Housing & Development Bank’s interest rate is set at 22.5% is the highest we’ve recorded — however, HDB can potentially provide the biggest loans, with no maximum amount for its education facility.

Just to put that into perspective: The CBE’s deposit rate currently stands at 11.25% and the lending rate at 12.25%

Demand continues to be low: One bank exec we spoke to said she didn’t receive a single request for an education facility in over a year.

What’s holding demand up? First off, the lack of familiarity: “It’s just not an option that has ever crossed my mind when budgeting for my kids’ school fees,” admitted Ayman. “I think I may have heard about education loans being offered at my bank, but I didn’t really dig deeper.” Ayman has opted for borrowing from his parents to help plug the financing needs for his children’s tuition, but never considered taking out a loan from the bank due to lack of familiarity with the concept.

And banks haven’t been pushing the product: Credit Agricole decided to discontinue their education loans and shift its focus to educators instead, offering a special loan program designed exclusively for school teachers, “in appreciation for their important role in the education of Egypt’s youth,” the bank says.

And parents still prefer to take out personal loans to pay their school tuition: Customers are naturally more familiar with traditional products such as personal loans, and with little-to-no difference in interest rates, most parents are sticking to personal loans, which traditionally require less paperwork and allow more flexibility.

Personal loans offer more flexibility: Education loans require specific documentation from academic institutions, and the money goes directly into the schools’ pockets, whereas personal loans can be taken out and directed wherever the parent sees fit — part of it can go towards quarterly tuition installment, with the rest divided among other funding needs.

And the fine print on an education loan is often unappealing: One parent we spoke with opted for a personal loan instead of an education loan because the structure of the education loan “made no sense” as an option. “I was offered a EGP 750k personal loan, whereas the education loan was capped at EGP 100k, and I would have had to pay it back over a year, and then apply for another loan the next year,” he said.

But some banks are getting creative: Arab Bank, for example, provides a non-loan education payment plan that can be repaid over nine months at 1.25% interest. Parents can make tuition payments through their credit cards, and then notify the bank, which then makes room for more flexibility and applies a reduced interest rate, head of consumer banking Mohamed El Halawani tells us. The program has proven to be more popular among parents than traditional education loans, which the bank also offers at interest rates ranging between 14-15%.

One creative route: Tapping Egyptian students getting their education abroad: HSBC Egypt has been helping families through facilitating the opening of new international multi-currency accounts and other services, including access to exclusive partnerships with education institutions. None of the other banks we spoke with appear to be offering a similar service. The bank launched HSBC International Education in 2019 for its Premier clients, to help parents with the transition of their children moving abroad to continue their education, Nesreen Hafez, HSBC Egypt’s Head Of Wealth and Personal Banking tells Enterprise. While HSBC continues to offer traditional education loans at undisclosed “competitive rates,” they have been seeing an increasing interest in their International Education proposition, Hafez says.

So what can the banking sector do to make education financing options more appealing? “Start by lowering the interest rate,” a bank product head tells us. Despite recent attempts by many banks to reduce interest rates on their education loans, they’re still not low enough to be considered an appealing option.

Your top education stories for the week:

  • Amideast is helping set up several service centers for students with special needs at select universities over the next two years under a cooperation agreement signed with the Higher Education Ministry and 15 public universities, according to a cabinet statement.
  • Education and our privatization plans: The government has identified nonprofit and tech universities, hospitals, and healthcare projects to be offered to private sector partners.

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