The Nitty-gritty Of Education Loans

May 24, 2016

There is one thing that rules both student and parent minds - a good higher education. According to an HSBC report titled The Value of Education, 91 per cent parents see an undergraduate degree or higher qualification essential and 88 per cent find a postgraduate or Master's qualification important.

Parents not only seek a good education, they also want to send their children to a top foreign university. Nine out of 10 parents want to send their child for an undergraduate or postgraduate education to a foreign university.

However, when it comes to funding a child's education, parents are either tapping their reserves or are borrowing to cover the rising university costs. The HSBC survey estimates that more than four (44 per cent) in 10 parents are preparing to borrow or are borrowing to fund their children's education.

As the cost of a good higher education keeps rising, education loans are coming in handy for parents. Says Ajay Bohora, co-founder, managing director and CEO, HDFC Credila Financial Services (an HDFC company): "With the cost of education rising steeply over the past few years, the need for an education loan is increasing as savings are usually not enough. Especially for studies overseas, the cost is impacted by rupee depreciation and the high living expenses."

More students and parents are cottoning on to education loans as a means to fund higher studies. "All these factors have increased the total education expenses and every year the average ticket size of loan disbursement is increasing. Currently, the average disbursement amount for HDFC Credila is approximately Rs 13 lakh," continues Bohora.

And now that the government has announced a new Credit Guarantee Fund Scheme for Education Loans (CGFSEL), parents are increasingly looking at this option. Says Adhil Shetty, CEO, BankBazaar.com: "We hope to see much more traction in education loans. While undergraduate and postgraduate technology courses are the biggest chunk, there is also a steady increase in the number of students taking up media studies, communications, and other inter-disciplinary courses as well."

With growing demand, parents are also concerned about rising debt and the ability to repay such loans. The HSBC survey reckons that it could take seven years to repay a loan.

No doubt, education loans are welcoming in times of a funding crunch. But parents and children must also take care to fund their education in the most optimal manner. A good foreign education could cost several lakh; hence, students must opt for those courses that could guarantee employment.

Says Bohora: "Not every graduating student from the same academic institute gets the same salary, nor every graduate of the most prestigious institute of the world become a successful business leader by virtue of graduating from that institute. A student needs to consider the past records of placements, earning potential and the future of the course based on current trends. However, approaching an education loan provider in time, before application, can help in an early evaluation, helping in planning well in advance and not downsizing the dreams due to cost."

Parents also have to consider other expenses such as boarding and lodging etc; hence, they must be prepared to keep a buffer for such requirements. Says Bohora: "The total cost of education too must be understood well, considering not just the tuition fee but also the living expenses. This cost can go up to 25-50 per cent of the total cost of education overseas. Also, the depreciating rupee can further increase the cost."

As most students are not earning, parents may have to step in as co-guarantors of the education loans for their children. They may also have to put up some collateral, such as a mortgage or other property. Also, while taking an education loan, a parent's credit scores are considered. Says Ranjit Punja, CEO, CreditMantri: "Banks look at the income of parents and their loan-servicing ability as well as their credit profile. They conduct various evaluations and risk assessments of that credit before granting a loan."

Most banks may be comfortable lending to individuals who already bank with them. Besides, one of the most important criteria financiers are looking for in individuals is the ability to service a loan; i.e., repay instalments when due.

Education loans in India generally have a moratorium on interest payments, though, till a course is over. This might be extended for a year. This means that parents and students do not have to start repaying (in instalments) immediately. However, the cost of the loan could then go up because interest would accumulate, and add to the repayment amount.

Therefore, besides the loan amount, you need to consider also the repayment terms. Most banks offer both fixed and floating interest rates for education loans.

Regardless, both of these come with a reset period, after which the interest rate would be revised. It is essential to understand this reset period for each of these types before you decide on one. The interest rates vary according to the course, the amount taken as well as the tenure of the loan. The shorter the term, the lower the interest you will end up paying.

Says Shetty: "Banks may ask you to pay only the interest until the repayment starts six months after the course ends or once you start working (whichever is earlier). Consider this option carefully and avoid it if the borrower or the parent is in no position to pay the interest. Otherwise, the interest amount will be compounded over the "holiday" period. Compounded interest means a higher EMI, which would be a burden in the initial years of one's career."

Interest rates on education loans vary as these loans fall under the personal loan category. If parents can provide strong collateral, the interest rates applicable could be on the lower side. But PSU banks generally provide education loans at about 2-3 per cent higher than the marginal cost of lending, depending on the amount of loan a student seeks.

Says Punja: "The rate of lending depends on the bank's comfort with the sector and could also be influenced by whether one is banking with that bank. Typically, interest rates vary between 12 to 18 per cent."

Interest costs could be lower for students or parents who offer to start repaying EMIs before the moratorium period. Banks may offer a lower interest rate in such cases.

However, students and parents must note that it could take some time to complete the paperwork. In some cases, it could take two months. Hence, students planning to take a loan should start the process early. The standard way of applying for an education loan is to approach various lenders and do the necessary paperwork (thorough comparisons of all factors).

Another recently started initiative that could help in applying to various banks at the same time is the Vidya Lakshmi portal, started by the government to help students secure loans. Through this portal students can view, apply and track the status of an application. They can make three applications for education loans. However, remember that the applications could still be rejected if one does not meet the banks' criteria.

Says Shetty: "The portal currently offers a choice of 30 loan schemes from 18 banks. You would have to submit documents such as KYC, educational certificates, proof of parents' income and collateral security document copies."

The HSBC survey says that other loans such as personal and credit card loans also play a role, as 14 per cent of the parents consider this form of borrowing for education. These are typically more expensive loans and the interest rates on them are usually higher since they are unsecured.

As with any loan, ensure that you make repayments on time or it could add to the cost of servicing such a loan. Besides, it would help to keep your future loan eligibility clean.

As the survey indicates that parents take up to seven years to repay a loan, do consider getting an education loan quickly to reduce costs and raise your career skyward.

What To Look For In A Loan?

* Interest rates on education loans range from 12 to 18 per cent. So, go scouting for the best rates

* Banks usually charge a simple interest during moratorium. But it adds up in your loan amount

* Students could apply under the new Credit Guarantee Fund Scheme for Education Loans by the government

* Ensure students know all the costs involved, including living and other expenses besides tuition fees

* Interest on education loans from recognised universities have a tax deduction