Education loans have helped countless students pursue their dreams. But, they’ve also burdened some students, and lured more than a few parents into putting savings at risk for unrealistic ambitions.
Not all college degrees lead to happiness ever after. No institution can guarantee a job, much less a good, stable salary. That makes an education loan a major decision which impacts not only the student but also their parents and anyone else who guarantees the loan.
In most stories where an education loan was the villain, the students, and their families, had failed to do a cost-benefit analysis (and perhaps more than one). They’d forgotten to ask themselves a crucial question: Can we handle the ramifications of this loan?
Loans aren’t an inherent burden, as long as you know how to manage them.
The first question to answer is whether there is a reasonable chance that your bank-funded degree will fetch you a well-paying job. Keep in mind that a foreign degree may or may not land you a job in that country (or any other).
If you plan to return home after international study, while your foreign qualifications may impress a recruiter, you may not earn much more than someone with a domestic degree. If you have wild expectations, it’s time to rein them in.
Once you’ve decided to pursue a Master’s with an education loan, you have to choose a university and city that will suit your budget.
You may not want to, but you should ask yourself what is affordable. Will the visa and university rules and conditions allow you to work part-time as an international student? What about post-graduation visa requirements? Will you be able to stay on to look for a job, or will you need to leave as soon as you graduate?
Do your research before shortlisting courses. Talk to people who have taken those programmes. Ask about course content, faculty, and job opportunities. Dig for information; you must prove a return on investment for your studies.
When looking for a loan, determine which banks have the lowest interest rates and the most student-friendly terms. Public sector banks usually win here (and these days, they are also more likely to sanction education loans). But, do not make the mistake of looking at a single loan product. Each one varies tremendously, and you may miss a terrific opportunity without a close look.
Explore whether preferred suppliers offer any concessions that may apply to you. You may just find special arrangements based on family income, lower interest rates for women, or a reduced margin (your contribution toward meeting the cost of the study program). Find out whether loans may be taken in smaller tranches (only when you need to pay fees), as this will reduce your total loan burden.
Always look for scholarships. “Not a chance” may be your first reaction, but knock on every door. Spend plenty of time uncovering the various public, private, and philanthropic scholarships available. A well-written letter explaining who you are and your academic interests and achievements will help you build a persuasive case.
Remember that you can apply for scholarships later, don’t rule them out just because you don’t have a chance before arriving on campus.
After you’ve been accepted into a university and your bank loan has been sanctioned, the next step is to formulate a repayment strategy. The most important point to consider is the grace period before repayments begin. This often lasts for one year after your studies or six months after you get a job, whichever is earlier. Properly considering this period may ease your loan burden.
Banks still levy interest during your grace period; it’s only a repayment holiday. They typically begin charging interest immediately after disbursement of your loan. While you don’t need to make payments during your grace period, you’ll be rewarded for repayments made, occasionally through an interest concession.
By making payments before you’re required to do so, you’ll also be able to reduce the principal and the interest. If you can pay simple interest during this time, it will make an impressive difference.
While at college, work part-time if you can. At the very least, a frugal lifestyle will ensure the safety of your financial future. Keep a tab on your expenses and reduce any unnecessary costs.
You might also use the grace period to build an emergency fund that can reduce your risk of non-payment in the future. Remember, if you default for 90 days or more, your loan is declared a nonperforming asset (NPA), which is an alarm bell for your bank and a red flag for future would-be creditors. Any default affects your credit worthiness, and you will have trouble getting a loan in the future.
Of course, taking your studies seriously is a wise, though indirect, strategy to ease your loan burden. The better you do in college, the better your job prospects, and the better your repayment capacity.
If all goes well, and you land your dream job quickly, you can start repaying your loan as scheduled. If you do a cost-benefit analysis of prepayment, you may find that it is a better option than any tax rebates for borrowers. If and when you receive a bonus, you may want to use it towards your loan to reduce interest.
Pay more than the minimum when you can, so you can repay the loan earlier and begin saving for your future.
But, what if things don’t go exactly to plan? What if you don’t find a job you like? Worse, what if you don’t find a “proper job” at all?
Student and career counsellors say that if the “ideal offer” doesn’t come your way, you should accept what you get, for the sake of financial stability. If you only manage to find a part-time job, take it, and continue looking for a position that suits your needs.
Remember, banks may consider extending the grace period only in exceptional macroeconomic circumstances. A “balloon repayment” option, where you make lower monthly payment in tough times and higher ones during better days, is more likely to be offered. You may also be allowed lower payments for the first few years of your career when your salary is likely to be lower, but you may need to negotiate these terms.
In rare and most deserving cases, banks allow extensions up to 10 years for higher loans. If you plan to launch a start-up right after college, you may be able to merge your education loan and your business loan.
Millennials are on track to be the most educated generation in history. But that also makes them the most indebted. But, that doesn’t mean you should fear an education loan – you just need to understand what you’re in for before you take the leap. It could make all the difference.
Author Bio: Rishabh Goel is an Associate Relationship Manager at Prodigy Finance. He studied Economics & Engineering at BITS & Masters at London Business School. He has helped Indians excel at GMAT/GRE and mentored students to attend top schools globally.