A word to student borrowers

Don’t make your loan repayment stressful
A word to student borrowers
This 21st generation is totally apart from the past generations as they are struggling under the weight of heavy bank loans.Pixabay [Creative Commons]

We are living in a century of unprecedented worsening of economic situation. At the same time, they are continuously engaged in changing their priorities to live an economically convenient life.

Today, when young individuals start peddling their lives, either as students or employees, debt looks like the best solution to them to boost their morale on the financial front.

However, it has proved only a temporary fix that later sets in to drag them into a debt trap. This 21st generation is totally apart from the past generations as they are struggling under the weight of heavy bank loans.

In other words, youth falling into debt trap is a common phenomenon. Most surprising aspect is that they hardly take a moment to think about the reasons for falling into the trap. Even as they are trapped in debt, they never try to scrutinize the reason behind their debt crisis. They even turn a blind eye to the fact that debt can lead them to a disastrous future, can consume their assets, hurt their relationships and even bring them acute mental stress.

Many youths find themselves in debt because they delay in taking care of their lives with a lower income and thus they begin to take route of bank loans. For most of them, living within their means is not their cup of tea.

The situation stands further complicated. The emergence of Covid variants at regular intervals has derailed the smooth economic recovery and has triggered an unprecedented surge in unemployment. Millions have been left jobless and millions witnessed drastic cut in their incomes.

This dwindling economic scenario has resulted in the rise of defaults in bank loans. Precisely, the ongoing Covid-19 pandemic has further complicated the scenario where most of the people have fallen into a debt trap which includes innumerable borrowers failing to fund their EMIs (equated monthly installments).

The reason for deliberating upon the issue of young ones frequently falling in debt trap in today’s column is an inquiry sought by one of the acquaintances about the consequences of non-repayment of the education loan. Basically he had come across a news item a few days ago about Edelweiss Asset Reconstruction Company winning a distressed education loan portfolio at a 60% discount from Indian Overseas Bank ( IoB) at an auction last week.

It is worth mentioning that over a period of time, availability of easy loan facilities for education has lured youth to pursue higher studies. Besides, banks have been encouraged to provide education loans as it is classified as priority sector loans that they are mandated to provide each year.

However, for students, taking a loan for pursuing higher education is not bad at all, but the way it’s obtained makes it bad. Going to universities or college without a clear plan of how to repay for it has pushed most of the student borrowers into a debt trap.

Even as rising default in education loans was also a concern in pre-Covid times, the ability of banks to recover such loans from the defaulting student borrowers stands bruised as the last two years of the pandemic has shrunk the job market space for them.

The emergence of new variants of the virus has badly hampered the hiring capability of companies across the sectors as the virus-induced uncertainties about the economic outlook refuse to go away. In this situation, those who pursued their education on the back of a bank loan have found themselves at crossroads as they face grim chances of getting employed in the near future.

This incapacitates them to fund their EMIs towards their education loans and resultantly, they turn loan defaulters.

We can understand that such borrowers are not willful defaulters, but there is a breed of education loan defaulters who willfully dodge paying their EMIs. Let me come back to the acquaintance who referred to a news item about Asset Reconstruction Company (ARC) buying the education loan portfolio of a bank.

How does it change the status of an education loan borrower? Does it mean absolving the borrower of his liabilities to repay the loan? These were a few interesting questions asked by the acquaintance.

Here, it makes sense to clear the doubts which may be floating in the minds of education loan borrowers that banks selling distressed education loan portfolios to ARCs means more trouble for the defaulters. Let it be clear that such loan reconstruction means transfer of all the rights of ownership and collection of the loans to the ARC concerned.

The ARCs will explore all possible measures, mostly harsh measures, to catch hold of the education loan defaulters and make them repay all dues along with interest. Actually, it would be the worst kind of trauma for a student loan defaulter when his/her loan liability in a bank is transferred to an ARC.

So, default in education loans is not only stressful for the bankers, it is also loaded with a huge tendency to ruin the career path of the student borrowers, especially when it’s transferred to an ARC for recovery. Innumerable stories of ARCs harassing and humiliating an education loan defaulter have already been reported.

Actually, there are two difficult situations in education loan default. One, after completing their course and enjoying a moratorium period (repayment holiday) majority of the student borrowers have remained unemployed. Thus, with no income earnings to deposit monthly equated installments (EMIs) they have turned defaulters.

Two, there’s a section of student borrowers who have landed in some job after completing their studies, but find it difficult to pay the EMI fully as their earning doesn’t match the repayment liability and their personal day to day needs. Resultantly, the debt has left them in acute mental stress. Not only this, the defaulting students are now facing the risk of facing credit constraints from banks and financial institutions in their future endeavours.

We should also not overlook the fact that with the burden of loans on their shoulders, the majority of the students could face severe psychological pressures, affecting their performance both during studies and while on job. This burden adversely impacts the attitude of students and of society as a whole with dangerous implications not only for the development of education, but also for the very social fabric and nation development.

Meanwhile, this problem of growing education loan defaults needs serious attention. It’s as good as a shameful blot on the higher education system, which unfortunately produces degreed liabilities more than employable young force. It’s of utmost importance to peep into the affairs which act as the drivers in increasing education loan defaults. Otherwise, it’s going to be a tsunami which has the capacity to ruin the potential of our talented educated youth.

However, there are a few important things to consider for the students before availing education loan facility. Of course, access to education loans is easier as compared to other forms of loans. But it’s repayment can be more stressful.

Since these loans come with a repayment holiday which includes a course period and some more months after completing the course, the student borrowers should use this moratorium period for saving a portion of their earnings.

Out of this saving, they can later on fund their EMIs. It would also be better to repay the interest portion on a monthly basis. They would avoid accumulation of their loan amount at the end of repayment holiday and would also earn rebate on interest rate. Subsequently, EMI will also reduce.

The student borrowers have also to keep in mind that their good repayment history of education loans would help them to secure a good credit score, which means they can get easy access to other forms of loans in future.

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

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

Greater Kashmir