Education loans like all other loans can create havoc in your personal financial life if not managed carefully. Even though it is considered under Good Loans as it helps in building a productive asset (Human capital), still this goodness can make your life worse if this liability does not get paid off timely.
Education loan is a first loan which one may face and that too at the start of financial life. Even if you feel that you are adequately saving for your kid’s education and might not require to take any loan, but this is also true that the future is uncertain and you have other important goals too like your Retirement which also needs to be funded adequately. And for retirement, there’s no Retirement loan available in the market. Health problems can wash off most of the savings, and many more uncertain instances can impact accumulation towards child education.
The reasons I feel for education loan to become imperative going forward is one, the Kind of lifestyle we live which requires us to save more for Retirement and health, and thus leaves less to save towards kid’s education; other is the way education inflation is rising.
Also the quality of education is deteriorating and numbers of degree holders are increasing, which in turn restricts the quality and number of Job offers and salaries. In such scenario if by any reason the education loan repayments were not honored than this is not good for you and your kid’s future. So, one should always consider these 4 factors before going for education loan.
What is so important about education loan?
Gaurav took education loan for his MBA as he did not want to put burden of his higher education on his family. Since MBA was his only goal so he did not research much about the quality of institute, and history of job placements and joined one institute near to his home. He took education loan of Rs 3 lakh @ 11%.
His College, to justify the Placement record invited 2 insurance companies which took all the students for sales profile to sell insurance policies. Gaurav did not accept that offer and decided to search on his own. When he could not find any suitable job, he decided to start his own business. It took him 5 years to establish his business.
Finally settled in his life, he decided to buy one car and also wanted to have some business loan to expand his business, but to his shock the bank rejected his Loan application, reason quoted bad Credit score. After getting into detail, he found that the education loan he took was left unpaid due to which his credit score was impacted badly. Though he’s cleared his loan in complete now, but the damage has already been done and will take years to recover.
If taken, education loan would be the first organized loan which anyone takes in his financial life. See how risky this is for the lender as repayment of loan totally depends on borrower’s future uncertain income. To secure itself, lender asks for parents as co-borrower in every education loan application, so that in case of default, parents can be asked to repay the loan. Over a certain limit Banks also asks Third party Guarantee and also tangible collateral.
Banks provide a moratorium period which is 6 months after getting Job or 1 year after completion of course whichever is earlier, by when borrower can start with the EMI payments. Banks consider loan as NPA if they don’t receive the EMIs for consecutive 3 months.
Default on education loan is not only bad for primary borrower but for the co-borrower as well. This default gets reported to CIBIL and impacts CIBIL Transunion Credit score. Going forward when the primary borrower would require any other loan like car loan, home loan etc. he may not be able to get it smoothly due to bad credit score.
In developed countries, the credit score is asked for in many situations like by employer while recruiting, by landlord before renting out house, by telecom companies before finalizing the credit limit etc. In India I know some banks and IT companies asking for credit report before recruiting someone, even SEBI asked for my Credit score before granting Investment adviser license. So things are changing fast and your credit score is a very important number, representing your overall credibility and you should not take it lightly.
It is, therefore, absolute necessity that you should honor education loan repayments on time even if it requires living on tight budget or controlling your other spending urges.
What if you could not repay your education loan?
Everyone is not so lucky and courageous like Gaurav to have started with own business when could not find suitable job. But still it took him also 5 years to establish and missed out the Education loan repayments. Many keep waiting for job and also sometimes accept whatever comes on the way. I have seen people struggling to pay or completely ignoring the education loan EMIs due to low salary or generating low surplus after family expenses.
But banks want their money back, and I have explained above, how important it is to pay back your education loan in time. So what can you do in such situation when you could not repay your education loan due to no job or low salary.
Approach your lender bank and explain your situation as to why you are finding difficulty in repaying EMIs. Banks are normally accommodative in such cases. Normally banks offer education loan repayment term for up to 10 years. SBI student loan offers loan repayment term for Indian education up to 10 years and for foreign education up to 12 years. You may request for the Loan term to increase which will reduce your EMIs amount. This will help you to manage the repayments in case of low salary.
In rare instances depending on case merits and sometimes your relationship with the bank manager, banks may extend the Moratorium period i.e. the period in which you need not pay anything to the bank.
You may ask your parents/relatives to support you in this situation. You may request your parents to service the loan interest during the moratorium period which will assure banks to some extent that you have good intentions and also this will help you in your negotiating phase. If possible, take up a part-time job to service the interest amount during the moratorium period. Banks offer 1% discount on interest payment if you keep servicing the interest.
If you are in a position to comfortably pay back the education loan then do consider these 4 factors before prepaying the loan
Conclusion
First things first you should not take any loan without having a plan of its repayment. If it is education loan, and where you cannot be sure on future income, then also do your due diligence of the institute and the prospects of educational course you want yourself or your child to pursue.
I do understand that many times even after taking all precautions you may find yourself in a fix on loan repayments, I agree Life happens, but then rather than ignoring the loan repayments which can be disastrous for your financial life, find out ways like explained above to settle down the things.
Did you face any situation where you find difficulty in repaying loans? how did you come out of the situation? Do share your experience.
defaulting a financial instrument is never good, for that matter with the credit rating agencies and banks having access to your credit history defaulting for any loan is harmful.
Hi, great article. I read recently that cibil identity theft has become common these days. This scares me a lot, is there a way to avoid them?
I have a education loan which I am repaying @15K per month. I send the money to my fathers account and he deposits it into my loan account every month. Am I eligible for any tax benefits-?
To the best of our knowledge, since, the EMI is paid from your father’s account, so he may be eligible for Income tax Deduction U/s 80E, if he is the borrower of the loan, taken for your studies.