Your Money: Easing the burden of student loans

Though there is a moratorium period before repayment starts, it is best to start paying the interest even while the student is studying

Your Money: Easing the burden of student loans
A college education is a long-term investment.

In today’s context, students have various college options, from community colleges to three- or four-year courses at colleges and universities, to technical, professional, management, vocational, arts, science, and certificate programmes. Borrowing money for continuing your education generally pays off. A college education is a long-term investment. Let us discuss the nuances of managing student loans.

Loan types & repayment tenure
Higher education loans are available for full-time and part-time courses and even for working professionals. Broadly, there are two types of education loans available. One is a collateral education loan wherein the borrower pledges collateral to avail a loan. Collateral could be a house, non-agricultural land, flat, fixed deposits, insurance policies, rated corporate bonds, government securities / bonds, etc. Second is the non-collateral loan, under which the borrower is not required to pledge any collateral. Non-collateral education loan is offered only for loan ticket sizes of Rs 4 lakh-Rs 7.5 lakh. But, the student and the financial co-applicant (usually parents) have to meet certa in criteria such as income, CIBIL score, etc. Another important criteria for availing such loans is the applicant’s academic profile.

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Coming to the repayment, most of the banks offer education loans with a payback of up to 15 years both within India and outside India for higher studies. By any chance, if the student fails to repay the loan amount, the financial co-applicant is held liable.

Repay interest during the moratorium period
Repayment of the education loan does not begin immediately, it commences after the moratorium period, which is 6 to 12 months from the completion of the course. Though repayment does not start until the end of the moratorium, the interest on the loan begins to accumulate from the moment the first tranche of the loan is disbursed.

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So, one of the best ways to manage is to start making payments towards this interest while the student is still studying. Either the financial co-applicant, i.e., the parents, or the student, if he is engaged in any part-time job, can start paying off the interest.

Go for shorter repayment tenure
Though banks might offer a payback of loan up to 15 years, it is advisable to opt for a short term. A shorter tenure might look like you are paying higher EMIs, but it will save a lot in interest paid on your loan. However, the student should consider his/her take-home pay, living expenses, etc. while deciding about the tenure and choose the shortest possible tenure within which the student can manage.

Avoid missing out on EMIs
Missing out on education loan repayments could be detrimental to your financial reputation. It might possibly negatively affect your credit score and you may end up paying penalties, late fees, etc. It is a good idea to set up automatic debits from your salary account. This will ensure that there is no missing out of EMIs and associated penalties. Regular re-payments will also help to maintain a healthy credit report. A good credit report helps in multiple ways while applying for loans in the future.

Vidya Lakshmi Portal
To facilitate all the students interested in pursuing higher education of their choice without any constraint of funds, the government of India has set up a fully IT-based educational loan disbursement scheme, through the Pradhan Mantri Vidya Lakshmi Karyakram. The IT-based mechanism under the Vidya Lakshmi portal (www.vidyalakshmi.co.in) provides students with a single window electronic platform for educational loans.

The pandemic has affected everyone in the country and with recent relaxations related to Covid restrictions, students can now go abroad to pursue the education of their choice, utilising the loan facility.

The writer is a professor of finance & accounting at IIM Tiruchirappalli. With inputs from A. Paul Williams, research staff at IIM Tiruchirappalli

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