Exploring education loan

This is the time when admissions in professional colleges for courses such as medicine, engineering, management courses etc, are round the corner. Final results of many entrance examinations like NEET are in the offing. Simultaneously, this is the time for many parents for financial planning and most of them would be wondering for options to fund the education expenses of their children. Some would be looking for an education loan and some thinking to explore the option of using their savings to pay the fees, and other expenses of the course.

Let’s first talk about parents’ most favored option of education loan. The cost of courses, especially if the student wants to pursue studies overseas, is so high that for parents, especially salaried class, there is no better option but to opt for an education loan. Very rarely we see parents reluctant to see their children taking route of a bank loan as a first step towards their career building.

Gone are the days where taking a loan from bank was seen as a mark of disgrace. Today, this view stands radically changed. The fast growing consumerism coupled with emerging sea of personal needs has forced almost all segments of population, especially the young generation to embrace life on a bank loan. Precisely, a bank loan has become a faithful companion to individuals as well as families. Today instances galore which narrate that loans are extensively used, particularly by the younger generation, to realize their growing aspirations.

So, banking upon a loan to fund education expenses is not a stigma. It’s a trend now. However, there are certain things which parents need to consider before taking route of education loan. Parents need to check the future demand of the education course for which they are approaching a bank for the loan. It’s important because loan is not a charity. It’s a liability and is to be repaid along with interest. Once satisfied that the course to be pursued by their child has bright financial prospects in future and has no risk of future financial complications, they should explore the option of taking education loan.

One of the important components of the loan is its interest portion. It’s the cost of the loan. Currently, education loans are not cheap and one has to pay rate of interest ranging from 9 to 15 per cent. It varies from bank to bank and even type of course for which loan is to be granted also matters in fixing the rate of interest. Remarkably, the interest paid on education loan is tax exempted under Sec 80E of the IT Act.

Here the parents have to keep it in mind that the repayment liability is on the student after completion of the course. The most important for a student borrower is not to default. Notably, repayment of an education loan starts six months after getting a job or one year after the completion of the course, whichever is earlier.They should use the grace period, to plan some part repayment. They should try to build a corpus during the moratorium period which they can later use to service their loan account. And at the same time explore to pay interest portion monthly to lower equated monthly installments (EMIs). Many banks also give a 1 per cent interest concession to those who repay the interest during the moratorium period. So, it’s not bad to explore this option.

A default spoils the credit score of both the student and parents (usually co-borrower). If EMIs are not paid on time, the bank classifies the loan as a non-performing asset (NPA). This will have adverse impact on the credit history of the student and he/she will face difficulty in accessing other loan facilities in future. So, a repayment strategy in place before EMIs start is a must. If possible, do not take the entire loan in one go but in installments. This will reduce the interest burden.

Last but not the least, the education loan borrowers should not hesitate to share their difficulties with the bank if they face financial constraints. May be the bank gets convinced to reschedule your loan repayment or may be the bank would be tailoring a financial solution to get you out of the financial mess.

(The views are of the author and not that of the institution he works for)