Exploring education loan

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

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

   

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

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

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

Here the parents have to keep it in mind that the repaymentliability is on the student after completion of the course. The most importantfor a student borrower is not to default. Notably, repayment of an educationloan starts six months after getting a job or one year after the completion ofthe course, whichever is earlier.They should use the grace period, to plan somepart repayment. They should try to build a corpus during the moratorium periodwhich they can later use to service their loan account. And at the same timeexplore to pay interest portion monthly to lower equated monthly installments(EMIs). Many banks also give a 1 per cent interest concession to those whorepay the interest during the moratorium period. So, it’s not bad to explorethis option.

A default spoils the credit score of both the student andparents (usually co-borrower). If EMIs are not paid on time, the bankclassifies the loan as a non-performing asset (NPA). This will have adverseimpact on the credit history of the student and he/she will face difficulty inaccessing other loan facilities in future. So, a repayment strategy in placebefore EMIs start is a must. If possible, do not take the entire loan in one gobut in installments. This will reduce the interest burden.

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

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

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