Factors to consider before going for Education loan

The way education cost is increasing, it may not be wrong to assume that going forward education loan will become a necessity to get good education from good institution. Rising number of private colleges along with emotional side of parents are some other reasons of driving the demand of education loan in India.

These days’ students want to go abroad even for undergraduate courses and it’s a general feeling that getting education abroad will give your career wings, but we all know that only “Red bull gives wings”. Moreover if it’s a foreign education, be ready to shell out huge. Though education loan does not support undergrad courses but costs are no less even in grad or post grad courses.

Leave aside foreign education, even in India the way private college and universities are coming, with hi fi infrastructure and flamboyance, all this collectively participate in education inflation. Quality of education is going down but numbers of institutes are going up. This also restricts the job prospects of the candidate.

Even good colleges charges big money which may be difficult to pay for a normal middle class people, and here again education loan comes into the scene.

Education loan like all other loans is a burden in itself, which if taken imprudently or not serviced regularly can leave a huge dent in your financial life. Through this article I would be sharing my thoughts on the factors you should consider while going in for education loan. It is not about how education loan works or math behind it, but some pointers to ponder to make your journey with education loan smooth.

1. Retirement Plan: You must be thinking that what retirement plan has to do with education loan? But actually it has lot to do.

Retirement and child education, both are certain and important goals which 99% of people want to plan for. Giving good education to kids and also live a comfortable lifestyle post retirement are something which everyone desires for. But if due to limited means you need to prioritize among these two, what would you select?

Many times people give priority to kids’ education, which indirectly means that they are saying no to comfortable retirement. In India we feel that spending on kid’s education is same like investing for Retirement, as kids only will become “Budhape ka sahara”, or keeping money for retirement or transferring the education burden on kids is like being selfish and it is parents’ responsibility only to get the kids educated. We are emotional beings and whatever decision we make under emotion most of the time is not right for us.

Somedays back i answered a query on social networking site Quora, where the person asked if he don’t save for kid’s college education , is this an irresponsible behavior, and i answered it’s not. There’s nothing to be ashamed of. This may be the other way of making them responsible.  Read the complete answer here

See here you have to understand that like education, Retirement has no loan available. Education will get finished in 4-5 years and after that kids will be earning to service the loan, but post retirement your income will stop and you have to make arrangement of your living from your savings only. You don’t know how your kid’s lifestyle is going to be, where he lives, where he works…so by not planning for your comfortable retirement indirectly you plan to be burdened on your kids only.

It’s practical to plan for your retirement first and then if finances permits save for kid’s education, otherwise education loan is there for your rescue.

The point is that you should consider education loan by looking at your finances holistically.

2. Credit Score:

Your credit score is very important parameter on which your loan eligibility depends. This does not apply only to education loan but on all type of loans including credit cards. Education loan application requires a mandatory co borrower which can be parents, siblings, spouse, and parents in law. Since child (Primary applicant) may not be having any score, lender will consider your/co borrower score to approve the application. Who knows you also decide to go for further education in near term, your good credit score is important. ( Read – how to improve your cibil credit score)

Even if at present you have resources and you have no intention to go with education loan, then also just to be prepared for the exigencies as future is always uncertain, you should keep check on your Credit score.

3. Employability of the course:

This point is important for both kids and parents. If the course selected does not have good job prospects, and after completing education your child does not get a job then you as a co borrower has to service the loan, Otherwise both of your credit score will get a hit.

Also if the starting salary is not much then it’s going to be a huge burden on family’s finances. The way quality of education is going down which also impacts the job prospects of the child; it is much likely to not get a good salary or a good job at all in the initial years.

While selecting the institutes , you should be sure about the placement track record, if you can contact few of the alumni it would be better to have understanding on prospects and working of the college. Not to mention about various accreditation with UGC/AICTE etc. as without which no lender will grant you loan.

4. Understanding the cash flow:

Even if you have done a proper research and are 100% sure on the good career prospects, but just imagine the situation when you or your kids pass out from college and finds economy in doldrums with no Job available.

While I was with ICICI bank, 2 of my colleagues left job and went to Singapore to pursue a 2 years professional course. They spent around 25 lakh, part from their own savings and part they managed with education loan. Unfortunately the course got completed in the end of 2007, and for next 1 year they were Jobless as the world economy was down due to Subprime fiasco. As they had their families to support , so after a year they compromised on the Job profile and some bank approved their Job application but at the same designation and with same salary at which they left few years back. But now they have to service the education Loan EMI too.

My Point is sometimes things don’t work out as per the expectations and experience. So better be prepared. It is only emergency funding and liquid savings that my friends had which supported the family and them. Though it was an extreme situation, but still you should have an idea on the average salary package that your child or you will get after completing the education. It should be enough to support the loan amount and also personal basic expenses. From financial planning point, education loan EMI should not be more than 20%-30% of monthly in hand salary. Also maintain adequate emergency funding with required insurances.

 5. Always plan for 10% extra:

You can get up to Rs 10 lakh of Loan for education In India and up to Rs 20 lakh for education abroad. Though the loan amount covers most of the expenses like tuition fee, books, travel expenses, stay cost…but still you should also have adequate buffer in place to manage the unplanned/unexpected expenditure. Like for loans above Rs 4 lakh, many banks ask for 5% of margin money in case of Indian education and 15% for education abroad. Foreign institutions ask for Compulsory insurance, if your loan does not cover the insurance cost, be ready to bear the expenses. Also Rs 20 lakh for education abroad may not be enough, so plan accordingly.

Conclusion:

Product wise education loan is almost same in all financial institutions; there may be some additional features to attract the borrowers. It’s just your comfort and relationship with the bank that can get you a good deal. Yes, there are chances of negotiation on Interest rates too, which depends on the institution ranking and rating, servicing of loan in moratorium period and sometimes the collateral you are providing.

Besides this, just keep the above mentioned factors in mind before planning to go for education loan. In fact these should be considered while you start planning for kid’s education or own further education.

How do you find the “factors to consider before going for education loan”. Do share your experience or ask query in the comments section below.