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Education loan: Need for preemptive planning

Like any long-term investment, quality education is an expensive proposition and must be taken only after considering all other alternatives.

Hitesh Asrani |

Education is fundamental to the intellectual development of the individual. It’s one of the few investments that can last a lifetime and is impervious to market forces that dictate the value of contemporary assets like property, stocks and bonds, fixed deposits, and gold. Like all long-term investments, quality education is a very expensive proposition, and should be treated as such.

While it most certainly improves one’s, job prospects and opens up new employment opportunities, one must remain vigilant as to whether or not the benefits outweigh the downsides, of which there are many. As a matter of fact, education loan debts are the second highest cause of debt in the US (after home mortgages), with students collectively owing a total of USD 1 Trillion.

Over the last two years, the annual tuition fees of India’s most reputed MBA colleges increased by Rs 7 lakh, while starting salaries remained fairly consistent during the same period.

Education loans if not managed properly, can create a huge burden, not only on one’s credit score, but also that of one’s parents/guardians, i.e. the guarantors for the repayment of the loan. Thus, enumerated below are some of the factors one needs to keep in mind while applying for an education loan:

  • Prior research: Many universities offer excellent and contemporary courses, but some, including a few reputed ones, are officially blacklisted or under investigation, causing complications in both one’s career and loan approval process.

Also, if the course does not result in well-paying job opportunities, they become Non-Performing-Assets. It is therefore important to choose a degree that one is genuinely interested in while also considering its future earning potential.

Furthermore, knowing the quality of recruiters who approach the institute for campus placements as well as the salary packages they offer is essential when selecting a university.

  • Banks and loan providers: In India, several schemes allow one to apply for multiple education loans simultaneously, but while many major banks and non-banking finance companies offer education loans, the interest rate, amount tenure, and documentation process vary.

Additionally, the processing charge is usually around two per cent, with banks funding just 70 to 95 per cent of the loan amount. There are small intricacies that distinguish the different offering of various financial institutions, so comparing them and then deciding what works best in your unique circumstance is advisable.

  • Co-applicant policies: Lenders do not simply transfer the loan amount into the student’s account, but instead send it directly to the educational institution concerned. Public sector banks ask for collaterals on larger loans, and loan providers make it mandatory to have a co-applicant for the approval, due to rising levels of NPAs for education loans.

This makes the co-applicant a secondary payer in case of defaults. This means that if you fail to repay your education loan, the consequences of your inaction will adversely impact your parents or legal guardians.

  • Moratorium and post-loan finances: Moratoriums are a suspension of loan payments that occur on holidays during the course, extending up to one year or six months after employment is secured, whichever is earlier. While installments don’t need to be paid during these periods, interest keeps on accruing.

Banks also make payments in parts instead of as a whole, charging interest on the money disbursed, which needs to be paid off during each semester. Thus, one should avoid waiting for the moratorium to get over to start paying off the loan, ensuring a lesser payout altogether.

  • Tax benefits: Section 80E of the Income-tax Act lets one avail a tax deduction on loans from an Indian Scheduled bank or a gazetted financial institution. However, the maximum tax deduction period is eight years, and a longer loan lets one avail this benefit only for the first eight years.

Student loans, like any other, must be taken only after considering all other alternatives. They can be debilitating and although exceptions can be made in consideration of genuine macroeconomic reasons for unemployment or inability to pay, these cases are extremely rare.

Thus, knowing the full implications of the loan being availed and efficient preemptive planning can help ensure no unforeseen difficulties arise.

The writer is founder and director, CRP Risk Management Ltd.