Are Education Loans Worth The Effort?

Quality education is a must for a complete and successful life. For many, it is equivalent to graduating from a top institution. The cost of education is, however, increasing rapidly. In fact, the cost of studying at reputed institutions is already quite high.

Keeping this in mind, parents, who want to provide their children with the best possible education, invest their money in mutual funds (MFs), fixed deposits (FDs) or unit-linked insurance plans (ULIPs), for the long term.

But despite all this, one may still encounter shortage of funds. An education loan, therefore, plays a vital role in such a scenario by helping to bridge the gap between the shortfall and the required amount.

According to studies, the cost of education is increasing at an average of 15 per cent per annum. The tentative cost of an MBA is up from Rs2.5 lakh to Rs20 lakh in 15 years. So if a couple starts saving  Rs2,000 per month for 15 years, at an average rate of 12 per cent, they will be able to save approximately  Rs9.5 lakh.

While a degree from a university abroad may sound fancy and seem aspirational as you see more and more people move out, there is a cost attached to it and managing it is not always simple. But data shows that not many people seem to be realising this, given that it is relatively easier to get education loans now. The number of students flying abroad to study is increasing but so is the number of bad loans in the education sector. According to data by the Indian Banks’ Association, the percentage of defaults on education loans rose to about nine per cent as of March 2018 from 7.3 per cent in  March 2016.

However, that does not deter students from opting for education loan in order to realise their dreams of obtaining an international degree. But what might sound troublesome is the entire process – of securing loans to repaying them on time.

While narrating her story on availing education loan to fulfill her dream of studying abroad, Nabanita Das who is currently pursuing her MA in News Journalism from Nottingham Trent University, United Kingdom, said, “I had been working in the industry for more than three years before I took the sabbatical to join this course. So, I had a clear understanding what I wanted to do. I had saved to cater for my living expenses and took an education loan only for the study fees.”

But she had faced some initial hiccups while getting the education loan. “I initially approached a nationalised bank and while they did process my application, they took a lot of time which was becoming extensively difficult for me. I was still working in Delhi while applying for the loan in Kolkata, and the bank officials were not ready to process the loan until they saw me. It was quite a harrowing experience for my father to rush to the bank  everyday to request the bank to get it done. Thus, I shifted my loan to a private bank and had it processed in  10 days.”

No loan is easy to obtain. Any student planning to take a loan has to undergo various layers of screening before it is sanctioned.

As V.K. Sethi, Head, Mortgages and Retail Assets of Bank of Baroda said, academic profile of the student and expected future prospect after the completion of the course the student wishes to undergo are some of the major criteria being followed for granting education loan.

But HDFC Credila does not believe in the ‘one-size-fits-all’ approach and hence evaluates each case holistically.

“A comprehensive check on multiple parameters is conducted by HDFC Credila for both Indian and International Universities. The country of study, the level of study, course and Institute chosen by the student, academic and previous track record of the student, additional credentials of the students, co-borrower related credit parameters, quality and the quantum of collateral security offered are a few of the key factors which get looked at by while assessing the education loan application,” said Ajay Bohora, Co-founder, MD and CEO, HDFC Credila. HDFC Credila disbursed education loans of over Rs2,000 crore in FY 2018-19. HDFC Credila has crossed cumulative education loan disbursement amount of over  Rs8,000 crore.

While Bank of Baroda has disbursed Rs900 crore education loan in 2018-19.

Anubha Vaid, a professional Educational Counselor, who helps around 100 students a year to study abroad said some of the common banks from which students avail loans are Punjab National Bank, State Bank of India, Bank of Baroda, Canara Bank, Axis Bank and HDFC Credila.

The interest rates at banks can be as low as 8.50 per cent and as high as 13.70-14 per cent.

Regarding repayment, she said the ideal option is to start looking for job opportunities as soon as the student’s final semester begins as this will help to get started with the repayment plan as per the timeline.

“However, the process begins as soon as the student takes the loan, some options I recommend to my students are planning and creating a budget and prioritising the loan helps to ensure the student is on track with the schedule specified by the bank. Also depending on the contract there is a possibility to pay more than the specified minimum amount. After communicating with the bank, the student can consider the option of paying interest-only payments of the student loan. This helps to neutralise the mounting interest and helps them to pay the loan in time,” she added.

Higher education comes with its own steep cost. That should not deter people from aspiring. But it is extremely crucial to plan repayment well from the very beginning.

aparajita@outlookindia.com

sampurna@outlookindia.com

Following Your Passion

An Engineer by qualification, Arnav Mathur  speaks to Sampurna Majumder about why he quit his job to pursue his passion for travelling. He has been actively blogging about his travel experiences for the past two years and is now learning more about his passion by pursuing a Masters in International Tourism and Hospitality Management from one of the elite universities in the UK.

1. Which country and in which course did you apply for?

I applied for a Student Loan from SBI, to pursue my MSc in International Tourism and Hospitality Management from Leeds Beckett University, UK.

2. What made you opt for an education loan and what was the amount?

Simple, because I wanted to fund my education, which I wanted to pursue from UK. My fees for the first year was roughly Rs9 lakh, whereas I had to show an additional Rs10 lakh, equivalent to 10, 000 GBP in my bank account, as living expenses; while applying for the visa. After a discussion with my parents, we mutually decided that they will help me with showing the living expenses, and I will take an educational loan to pay off my fees.

However, reality was completely different. Apart from funding the Rs10 Lakh in my account, for living expenses, they also had to arrange Rs5 lakh towards my first year fees. This was because, SBI, themselves declared that they’ll be disbursing only Rs5 lakh for the first year, and Rs2.5 lakh for the second year. This messed up all our calculations and everything, because I wanted to pay off the maximum of my 1st year fees (Rs7.5 lakh), by educational loan.

3. Can you please take us through your journey- the entire process of loan application and getting it approved?

To be honest, the whole journey was not the easiest as expected. It involved a lot of running around, to the SBI Loan Sanction office in Karkadooma, in Delhi. SBI being SBI, they took a lot of time at each step. As far as I remember, I applied for the loan back in March or April 2017 and the whole process until the first disbursement took more than a month, and multiple visits.

The only reason for opting for an educational loan from SBI, was that it offered Rs7.5 lakh without any collateral, unlike other banks, which were offering hardly Rs3-4 lakh without collateral.

4. What is the repayment scenario like and how do you aim to achieve this?

The course that I have opted for is of two years; where in the first year is academics, followed by one year of work placement, followed by the dissertation. So my loan repayment starts two and a half years after the commencement of the course (June 2020), and goes on for the next 10 years.

My plan is simple, to get done with the loan repayment in the next five years. That’s my five-year-plan, in order to start living a liability free life.