Factors to consider before taking an education loan

Padhega India tabhi toh badhega India. But quality education has become a luxury to a middle-class person in India. The college admission seasons will be starting shortly in India, and students often find themselves in the dilemma of whether adding to debts is really worth it or whether they are stretching their legs beyond the coverlet.

If education were free, don't you think the world would be a better place to thrive in? 

Since it's not free, Education Loans come as a handy option because they provide somewhat an affordable gateway to taking admission in the top institutes without the burden of instant payment. Yet, choosing a suitable education loan is something to take into careful consideration.  

Today we will learn the factors to consider before applying for an education loan but first let's understand what an education loan actually is.

What is Education Loan

In very simple terms, an education loan is a financial aid that a student can avail to advance in their education. This sum covers the cost of tuition, living expenses, books and related expenses. 

Repayment of the loan is deferred for the duration that the student is in college and usually starts once the student has completed his or her degree. Sometimes an additional six months is provided as a moratorium, called the 'grace period.' This can either be obtained from government banks or from private-sector banks. 

Types are a broad category when it comes to education loans, a few of them are as follows

Types of Education Loans

There are a number of categories of educational loans based on the type of programs that a student wants to get into. Let's just narrow it down to two categories- based on location and based on collateral. 

Based on location

• Domestic Education Loan

Students who choose to pursue higher education within the geographical boundaries of India can avail this education. This loan will get approved only when the student is enrolled in an Indian educational institution.

• Study Abroad Education Loan  

Most Indians do not have the financial resources to study in foreign institutes. To help realize their dream of getting a degree from foreign countries, secured overseas loans could be provided to students of an amount up to 1.5 crores.

Based on collateral

• Secured loans

The above-mentioned point of overseas loan has the word 'secured,' but it's not very clear what it means. Immovable assets such as agricultural land, residential property like a house or a flat or FDs, gold, bonds, debenture, etc., could be pledged as collateral. The interest rates are generally lower since the bank is at lower risk, and the amount loaned is less likely to be bad debt.

• Unsecured loans

In this type of loan, the borrower isn't asked to pledge security and can obtain a loan without providing collateral. These loans generally carry a comparatively higher rate of return because of the higher risk involved. The sum loaned is also limited based on the co-applicant's CIBIL score (a 3-digit numeric summary of credit history, ratings, and reports).  

What should you consider before taking an educational loan?

Personal traits

The first and foremost thing that you should understand is that this loan is solely your responsibility. Do not burden this loan on your parents. It is you, who has upgraded yourself with this course, and you have to own it. So, before you think of enrolling yourself into any course, do ask yourself a few questions like-

Am I really interested in pursuing this course?

Is the college's reputation worth the fee that is to be paid?

Am I going to XYZ college just because my friends are going there?

Do I really want to work in the field/ job profile which this course will offer me?

Have I figured out what exactly I want to do in life? 

If you are very clear with what you want and choose to go with the course, if you have planned your future and career in that field, go for the education loan. 

But if you haven't figured out where your inclination lies, and you think you need time to explore more options, you should think before going into debt. Save yourself from getting trapped in a dull and mundane job and a course you regret having done, with EMIs lining up your door every month.  

Institution and course

This might go against the stereotyped beliefs of people, but colleges these days are less about imparting classroom education and more about learning from and growing with peers. In most cases, students are lured into joining courses just because they offer good placements. Suppose you see yourself in a similar situation. In that case, you have to wake up your inner mathematician and calculate ROI. You must know whether the package would suffice to pay off your interests on loan as well as your daily expenses. 

Here's where the role of college becomes essential. Make sure to check for the college, stream, network, alumni, placement details, and past track record before enrolling.

Financial perspective

The 3rd point that you should consider is the rate of interest at which you'll be getting these loans.

As Albert Einstein rightly said, "Compounding is the eighth wonder of the world." And this compounding can work against you if you don't select the appropriate interest rate for a Bank loan. Even a minute difference of 0.05% in interest rate can lead to a huge difference in the future value of the loan. (Scary stuff indeed!)

Make sure that you are given a moratorium period while studying, so you don't have to pay EMI during this period. But we ignore the fact that, even though we don't pay EMI during our education's tenure, accrued this interest attracts more interest on itself, so the total EMI payments increase. Processing fees should not be ignored.
 

Some Maths

Suppose you take a loan of 10,00,000 today at the rate of 7.5%, to be paid in 10 years. The total interest due would be Rs. 4,24,421. And your monthly education loan EMI would be Rs. 11,870. Gradually, you will end up paying Rs. 14,24,421 by the end of 2031. 

Now, is it something that you would be okay with is all on you to decide. 

Below is a list of different banks in India with their student loan interest rates. 

Educational loan interest rates

The spending for pursuing education can let you save on income taxes. Useful fact, isn't it? You can claim a deduction of interest paid on loan taken for pursuing higher education from taxable income under Section 80E of the IT Act. According to Section 80E, the interest paid on a loan is eligible for a deduction, and there is no cap on the amount to be deducted. The entire interest amount is deductible from the taxable income. For this, one needs to obtain a certificate from the bank from where you took the loan. BUT, BUT, BUT, do remember; no deduction is allowed on principal repayment.

Finally, you also need to take into account the ease with which you get these loans. If you apply for a loan, some banks may disburse it immediately, while others will have a tedious process that may take weeks to complete. (We all know how tiresome banks can get) 

Conclusion

A very sad reality of this nation is that people think availing loans is a solution to all their money problems, not realizing that it is actually adding to the burden. If you have read this far, you know everything there is to know about availing of educational loans in India. 

 So, if you are on the verge of missing out on any educational opportunity due to inadequate funds, then use an education loan as your shield. Contrary to this, if you haven't figured out what you want to pursue, don't fall into an unnecessary debt trap. 

It takes decades to save a sum of 10 lakhs, and a lifetime to repay it. Decide wisely.