Namrata Shukla, a physiotherapy student from Delhi, recently completed her four-year course but is now worried about repayment of a `4-lakh education loan, which she took four years ago to fund her studies. She is in desperate search of a job as repayment of loan will start in few months.
In India, there are a number of students who face the same crisis of loan repayment and there are many reasons behind this crisis situation including bad choice of college, poor marks, unemployment crisis, useless degrees, etc.
In India, education loan defaulters' numbers have increased in the past four years and is one of the causes of rise in banks' NPAs. Banks become the only source of money, if parents are unable to finance the higher studies, but one should look at return on money before selecting a course.
One should opt for quality education. Asokan Arumugam, CEO, Reliance ARC says: "Students should be realistic about the job prospects. They should not simply think that if I don't get a job the government will write it off and pay the loan. Education is an investment like any other investment. It is always important to do a thorough due diligence on the course before taking loans."
So, if you plan to take an education loan, here is a guide on how to manage it.
Benefits of education loan
For a middle-class family, education is an investment, and students become more serious about studying when they apply for loans. Education loan also provides tax benefit under 80E of the Income Tax Act.
Tanvir Alam, MD, Fincart says: "I know a lot of people who were capable of becoming a good doctor or engineer but they end up their life as a compounder or mechanic due to lack of resources, so education loan helps to take decisions for better life and career."
Most of us take education loan for quality education and good job. Some also take loans as they don't want to put financial burden on the family. So, if you are capable of proving yourself and can repay on time, then education loan is the best option to help you in getting a quality education. Repaying loans typically happens in 3-10 years. It also depends upon the bank and course you opted for.
There are many factors that lenders look at before giving a loan. "Lenders look at multiple parameters which include but are not limited to academic background of the student, co-borrower, collateral security offered, course, college and university selected for higher education etc," Co-Founder, MD & CEO of Credila Financial Services, Ajay Bohora, says.
How good is the college?
Before taking a loan, it is very important to look at the job prospects after completion of course. A major issue with today's education system is that return on investment for various higher education courses is very poor. There is no authenticated rating and benchmark system where colleges get validated (except for A grade colleges). Hence, beyond A category colleges, it makes sense to do some industry-oriented courses along with traditional education to make you more prepared in the job market.
Do a fair valuation of the course before taking a loan. Consider the return on investment before enrolling for a course. For example, Tanvir Alam states that if a student does BSc in computer science along with online digital marketing certification, the job will initially fetch a pay of around Rs.15,000 to Rs.30,000 per month. A loan of Rs.4 lakh at 11 per cent rate with a repayment period of three years will have an EMI of Rs.13,095. So, if the candidate earns only Rs.15,000 then it will be a struggle for him to repay.
What if you miss the EMI?
If you don't repay your education loan on time, the bank will put your name as a defaulter in the CIBIL list. "Sometimes, when you go for a job, they will check with CIBIL and if your name is in a defaulter list, you won't get a job," Arumugam said.
Not paying in time or defaulting can also lead to legal action. Puru Vashishta, Director, Deal4Loans says: "On default in EMI payment, the credit score gets adversely affected, thus making you ineligible for future loans. Also if the guarantor has put in place collaterals such as fixed deposit or property for your education loan, then the particular individual may not gain freehold rights on the collateral until the full payment of the loan."
Extend the term
If you miss out on any EMI payment, you can request your lender to extend your loan repayment tenure so that the monthly EMIs could be brought down to a level that you can afford. Moreover, if the student is not able to complete the course within the scheduled time, he/she can avail an extension of two years.
Restructure the loan
Many lenders also allow students to pay just the simple interest or partial simple interest until he or she finds a suitable job. They also give a chance to pre-close the loan by liquidating an investment. You should always ask your lender what relaxations one can get to make the repayment process easier.
Credit counsellors help and advise you on how to go about your education loan. "It's important to approach counsellors if you find difficulty in deciding how much you should borrow but beware of people who will act like advisors but actually sell you the bundled product like loan with insurance policy," says Alam of Fincart.