Source/Contribution by : NJ Publications
To stand out among 1.35 billion people, to meet the growing needs, to build a career of their choice, students wish to pursue their higher education from premier institutions in India or abroad. But most often quality education comes at a very high price, and it may not be possible for parents to fund such expensive education from their existing resources. Education Loan offered by banks and NBFC's lays the way out, every year tens of lakhs of Indian students take education loans to pursue higher education and professional courses. Sometimes it is also not about affordability, many students take education loans because they don't want to burden their parents with their exorbitant education cost. Education loans brings higher education within students' reach, and also offers tax benefits on the interest paid on these loans under Section 80E of the income tax Act.
However, there are certain key points that you must take note of in context of education loan, that will help you better manage the loan:
Getting the Loan
- Compare before you choose: The rate of interest on education loan varies between banks as well as between the loan amount. The difference in interest rates charged by different banks on the same amount of loan can be as high as 4-5%. Also, your college may have a tie up with certain banks, and these banks may offer a discount on the interest rate. So, compare the loan terms of different banks including interest rates, processing fee, repayment terms, etc., before choosing the bank.
- Get the loan in tranches: Generally, the fee for higher education is payable in tranches, it can be semester wise or half yearly or quarterly, etc. It is ideal that you get the entire loan amount sanctioned, but withdraw only when your fee is due, since the banks will be charging the interest only from the time the loan amount is disbursed.
We will first talk about the Repercussions of non repayment of EMI's
- Non Repayment of EMI's can result in imposition of Penalties.
- The Bank can seize the collateral attached to the loan.
- Credit score of the borrower as well as the co-borrower (usually parents of the borrower) gets tarnished, which hampers your access to any other loans, like home loans or car loans in the future.
Post the 2008 global recession, many students failed in repaying their loans because of lack of or underpaid jobs and have faced the above repercussions. Although the situation has improved, but still there are cases when students do not get jobs immediately after college. So, it is very important that when you take an education loan, you must have a repayment strategy in place.
The income in the initial years of your career is low, but the EMI's will be there, it is ideal to keep your expenses limited to make sure you don't miss your EMI's, also try to save some money after paying the EMI's and expenses and build an emergency corpus to ensure there is no disruption in the flow of EMI's in scenarios like a job loss, a sudden expense, etc. You can opt for the Auto debit option for your EMI's, so that repayment is taken care of automatically.
The Education loan EMI's generally starts after a year from the end of the course or six months after the job starts. This relief period is called the grace period or the moratorium period. The grace period is also a good time to start saving and creating a corpus for your education loan, since there will be no outflow of EMI's. This corpus will help you in filling any gaps in repayment that may arise in the future. You can invest your saving in a Liquid Mutual Fund, so that you get a better rate of return than what you will get in your saving account, you can make partial withdrawals plus it is highly liquid, so you can easily withdraw even one EMI from your liquid fund in case you are likely to skip one for lack of money.
Generally only simple interest is charged during study period, if you pay this simple interest during your course itself, it can significantly bring down your EMI's later.
What if you do not get a job? Before the bank starts penalizing you by levying heavy penalties for non repayment, and yours and your parents' CIBIL score is affected, talk to the bank representatives, a suitable alternative could be figured out and your loan repayment may be relaxed. The bank may either extend the moratorium period or reduce the EMI by extending the loan tenure, etc. You will find a job sooner or later, the idea is to keep the bank in the loop to avoid any negative consequences.
Before closing the article, we have a piece of advice for the readers, Start investing from Day 1 of your job, if the burden of Education loan EMI is too heavy, so is the need to get into the investing routine and securing your future. Start with a small amount, say with an SIP of Rs 1,000 and increase the amount gradually. Education Loan is probably the first loan taken by an individual, it teaches you a lot about money and debt management in the early stages of your career itself. We hope that the above passage will help you in managing your education loan well.