7 Things You Didn't Know About Education Loan

With 140.76 crore citizens, India’s population is the largest and youngest in the world. There are around 31.5 crore students alone who would soon start contributing towards boosting the nation’s economy. But the dream of becoming a $4 trillion economy (around ₹333 lakh crore) in the near future is not as easily achievable as one might think. Education stands as the cornerstone of this transformation, and student loans play a pivotal role in bridging the financial gap that hinders countless aspiring minds.

Education loans have emerged as an indispensable tool allowing students to accomplish their dreams by enabling them to access quality education, regardless of their socioeconomic status. As per 2023 data, around 27.8 lakh students are relying on education loans to complete their studies.  

Despite being such a crucial part of our lives, people (parents and students alike) who take out these education loans are unaware of the many related aspects.

In that regard, I will be describing some of the least-known facts about student loans. This way, you could make a more informed decision for you and your children’s future.

Unpopular Details About Student Loan

You must be aware of some of these facts, and some might blow your mind like they blew mine. Let's see what they are.

1. Repaying Starts at School:

Not many are aware, but the borrower can start paying off the student loan even when they are still studying. While enroled at least half-time, borrowers are typically only responsible for paying the interest on their subsidised federal loans. This means that no principal payments are due until after graduation, allowing borrowers to focus on their studies without the immediate pressure of repaying significant amounts.

To make the after-graduation time somewhat pressure-free, students can start paying off at least the accumulated interest of the loan to their ability. This can help you avoid getting a considerable amount of debt paid off by the time you finish your studies. Plus, it’s also a good spirit booster, giving you a taste of the “real world” where bills need to be paid by each individual.

2. Relief Options are Plenty:

Now, there are times in a student’s life when they have to take more than one loan to manage their expenses. This could also result in high interest rates and more than expected debt amount after completing one’s education. But don’t worry! Plenty of relief options are available to take care of the student loan as swiftly as possible. Let’s take a look at them, one by one:

• Consolidating the Loans:

Since there are different types of education loans available, both central and private, such as Public Sector Banks (PSBs), subsidised, unsubsidised, etc., students often apply for more than one loan to fund their education throughout the years. This tends to increase their financial burden and strain.

To compartmentalise the loans better, consolidation of debt is advisable. What happens here is the borrower takes a big loan with better interest rates and then pays off the other loans to avoid the interest accumulation. After this, the borrower will have to worry about one EMI payment routinely.

• Refinancing the Loans:

Refinancing a student loan involves replacing an existing loan with a new one, typically with a lower interest rate. This can help borrowers save money on interest payments over the life of the loan.

Refinancing differs from debt consolidation considerably. In the former; borrowers need to have a good credit score and a low debt-to-income ratio. In contrast, this requirement is not necessary for the latter.

But you must remember that consolidating or refinancing a loan comes with certain obligations. It is important to consider factors such as the new interest rate, the terms of the new loan, and any fees associated with refinancing before making a decision. 🤔

Along with the above two, there are some other options available to pay off student loans faster.

• Income-driven repayment plans:

These plans base monthly payments on a percentage of the borrower's adjusted gross income, 10%, 15%, or 20%, making them more manageable for those with lower earnings.

• Loan forgiveness programs:

Certain professions, such as teaching, public service, and healthcare, offer loan forgiveness programs that eliminate a portion or all of the borrower's debt after completing a specified service requirement.

Thus, instead of stressing over the surmounting debt, it would be better to explore your options. After all, when all the doors are closed, there is always a window hiding in plain sight. 🪟

3. Increasing Defaults:

The number of citizens defaulting on their student loans has risen significantly in recent years. Default occurs when a borrower fails to make their loan payments for a prolonged period, leading to severe consequences such as:

• Damaged credit score: Defaulting on student loans can severely damage a borrower's credit score, making it difficult to obtain loans, rent an apartment, or even secure employment.
• Wage Garnishment: Lenders may pursue wage garnishment, where a portion of the borrower's wages is automatically withheld from their paycheck to repay the defaulted loan.
• Tax refund seizure: The government may seize the borrower's tax refund to offset the defaulted loan amount.

In India, of the ₹79,900 crore in education loans disbursed, about ₹6,246 crore have turned bad from PSBs by the end of 2022. This means that about 8% of education loans disbursed by PSBs have turned into Non-Performing Assets (NPAs).

To make this situation better, both the government and citizens need to cooperate. Financial literacy about student loans and other instruments would be the first step in this direction. Of course, you can always rely on Insider to help you in that regard. 🤗

4. Average Loan Balance:

As per UniCreds, the average student loan size was approximately ₹25 lakh in 2022, which is 18% more than the average loan amount of ₹21.5 lakh in 2021. Being educated is not only hard but also way too expensive at present time. 😳

This growing debt burden can strain borrowers' financial well-being and limit their ability to pursue other financial goals, such as purchasing a home or saving for retirement.

5. Interest Varies for Different Loans:

Interest rates on student loans can vary depending on the type of loan, the borrower's creditworthiness, and the lender. Federal student loans typically have lower interest rates than private student loans, as the government backs them. State student loans may also have lower interest rates than private loans, but they often have stricter eligibility requirements.

But, the credit score requirement for gaining such loans is much higher than the private ones. That’s why people turn towards getting loans from private lenders since maintaining a good score can be a difficult feat.

To help increase your credit score, check out the article What is a CIBIL score? And how to improve that immediately?

6. Student Loan can be Disrupted via Bankruptcy:

Surprised, right? I was, too, but it is true in some cases. However, this is typically only possible if the borrower can demonstrate that repaying the loans would cause undue hardship. The process of discharging student loans in bankruptcy is complex and may not be successful.

7. The Loan Borrower is Responsible:

Ultimately, the responsibility for repaying a student loan falls on the borrower. This means that even if the borrower's parents or other family members took out the loan, the young student would be equally responsible for repaying it along with the parents.
There are a few exceptions to this rule, such as if the borrower was not of age when the loan was taken out or if the borrower can prove that they were defrauded.

The Bottom Line

There are many other factors in an education loan that depend upon the borrower’s creditworthiness and the issuer’s policy. Thus, I highly recommend checking all the bullet points in a “Terms & Conditions” policy we usually ignore. This could help you get a good deal and secure your future for the better.

What other things do you think are important while applying for an education loan? Let us know in the comments. 👇