Education loan: What students should know before applying
Education is one area of expense in the lives of salaried individuals, for which they are always willing to take an extra step and stretch their finances. This comes naturally to most parents - their endeavour is always to do everything in their capacity to give their child the best exposure for a more secure future.
In today’s day and age, students have a plethora of possible paths to explore, be it traditional education or new age vocational courses before they embark upon a career path. However financing private education in India continues to get more expensive, almost at the rate of 10-12% every year, with just the tuition fees reaching Rs 30,000 to Rs 50,000 per year for private schools and colleges. The total cost of education that includes housing, books, devices, extra- curricular classes and coaching etc. adds another 30-100% and takes this figure to a higher level. To take an example, if the fees of the two-year management course at Government owned and backed institutes like IIMs continue to rise by 12-15% every year, it will cost roughly Rs 45 lakh in 2025.
Most salaried parents fund their child’s education out of pocket, which affects their cash flow and gets in the way of their savings. Families having substantial savings are more often than not, able to handle this scenario. However, even they ought to remember than in the long run, this would impact their financial security as they get older. From my interaction with children of salaried parents, I’ve observed a common pattern. Majority of such children express a desire to take part ownership of financing their education, knowing that once they complete their higher education from private institutes, they would get on a corporate job and have a regular flow of income.
Taking an education loan is the most common solution. However, students opting to take this route ought to be careful.
India’s education loan market has shrunk 25% in the past four years. Financing solutions are expensive, cumbersome. Banks typically favour higher value loans and avoid segment of loans below Rs. 4 lakh (without collateral). Private lenders usually insist on collateral like house, jewellery and land etc. to finance education; and these come with inbuilt risks. Students need to remember that just in case the expensive college education doesn’t lead to a suitable economic opportunity in the form of private corporate job or an entrepreneur venture not taking off, their parents may run the risk of losing their hard earned collaterals.
State backed education loans look far friendlier on paper with lower interest rates and a moratorium to pay etc. However, it is an open secret that many officials demand ‘extra money’ to process applications. That apart, Non-performing assets (NPAs) within the education loan segment rose from 7.3 per cent in March 2016 to 8.97 per cent in March 2018. Repaying an education loan for both students and their parents continues to stay difficult and this certainly has a major impact on a student’s financial interest in times ahead.
India’s credit bureaus are on a constant lookout for defaulters and a default gets reflected in the records of all the four credit bureaus. It affects the credit score of students and their parents for a long time to come; a scenario which should be avoided at any cost. Firstly, it creates a roadblock in getting access to any sort of credit in future. Students who have defaulted struggle to get credit cards and personal loans and seeking higher loans for assets like cars or home property becomes a nightmare. Their parents who are co-borrowers have an equal liability in the eyes of the banks- who are prompt enough to approach them in such cases. The situation isn’t any better for parents who act like guarantors for students who may have taken loans from banks. While a bank chases borrowers for the first six months, eventually they do approach parents for repayment and even the credit scores of parents gets affected. So whether parents play the role of co-borrowers or guarantors, they do end up bearing the brunt of such situations.
So what should students opt for? It is important for students to follow a balanced strategy.
A practical and viable option is to handle education expenses monthly, a step which would make the entire planning process easier for students and their salaried parents. Doing so reduces upfront payment burden, allows parents to have a balanced cash out flow, prevents pledging household assets, and doesn’t involve currying favor with officials. Market intermediaries and service providers like Payed have already stepped in to facilitate monthly payment of education fees by closely engaging with schools and colleges in India.
Deferred payment is generally offered with all education loans, wherein students get a chance to pause the outgo of their EMIs for a few months or years. Also known as the EMI holiday, if not offered upfront, students or their parents could request their lenders to allow payment deferring. This could be opted for if individuals are expecting a lump sum in the near future; moreover, this also helps to stabilize one’s financial conditions. However, students ought to check with their bank, as many banks and financial institutes add charges and penalties on deferring payments.
Normally, while opting for an education loan, the repayment period starts with bigger EMIs which subsequently decrease over the repayment tenure. Students can opt for a step-up repayment plan, wherein they have to pay smaller EMIs in the initial phase, which increases over-time. One should opt for this when one needs some time to increase one’s cash flow. Students who have recently got a job or are in a financial crisis could also opt for this. It is also opted by borrowers when they want to raise their creditworthiness as a borrower so that their EMI outgoes are small.
(Author NV Subramanian is Founder and CEO, Payed. Views expressed here are personal.)