While taking education loans, many students inadvertently make mistakes, which can impact their financial future. Rising educational costs in India (inflation rate of 11-12 per cent), have made education loans a crucial financial instrument for many families. However, mistakes in loan acquisition can lead to long-term financial stress.
In short, students should do proper research, carefully go through loan terms, avoid over-borrowing, and plan repayments meticulously, and consider early interest payments before entering the moratorium period.
Rohit Gajbhiye, founder of edu-fintech startup LEO1, emphasises the importance of starting the loan application process early contrary to the popular belief that student education loans are easily accessible after admission.
He says: “It can help reduce undue stress as fee deadlines draw nearer. Providing accurate and complete information during the application process is an absolute prerequisite. Neglecting necessary documentation not only leads to delay in the loan process, but also increases the likelihood of rejection by lenders.”
Insufficient Research: Applying for a student loan without proper investigation or comparing offerings from different financial institutions can lead to one missing out on the best deals available. For instance, for both domestic and international higher education loans, it is typically public sector banks that offer a lower rate of interest compared to private sector banks. So missing out on this bit of information can lead to one completely ignoring public sector banks for private banks and non-banking financial companies (NBFCs). Using the government-run Vidya Lakshmi portal can also help students find competitive rates of interest. One should also talk to peers and family members who have taken education loans for additional information.
Signing the loan contract without understanding the loan document’s fine print can lead to unforeseen issues. Seeking professional advice or guidance from experts is crucial here. For this, one should not check just the rate of interest on the loan, but also how the interest is being calculated. Other aspects, such as processing fees, coverage of education costs, repayment options, and collateral requirements are equally important. One should also check out for any prepayment penalty.
The turnaround time is another important factor that one should consider before choosing a borrower. Turnaround time means the time consumed from starting the application process till the loan is sanctioned by the lender.
Gajbhiye says it is crucial for students to carefully evaluate their future earning potential before choosing the maximum loan amount. This will ensure a prudent alignment with their repayment capacity, he says.
Availing of loan amounts more than what is actually required can burden you with higher repayments and interest outgo. Using an equated monthly instalment (EMI) calculator to calculate the interest before availing of the loan will help in better planning, he says.
One should take a disciplined approach when it comes to loan repayment. Student loan repayments typically start six months after job placement or one year after course completion. But the interest starts accumulating once the loan amount fund reaches your college, and is then continually added to the principal amount. So, early interest payment, before waiting till 6 months or one year can reduce the debt burden. If you defer loan repayment also, note that the interest is still accumulating.
Says Gajbhiye: “As far as tips for easy repayments are concerned, it’s best to craft a focused 4-5 year repayment plan and align savings targets with the loan payment schedule. Opt for a repayment option that suits your budget, keeping a constant eye on the moratorium period for job hunting and savings accumulation.”