Factors to consider before taking an education loan

Anurag Saha has just been accepted at a prestigious institute for an undergraduate programme in engineering. He is keen on taking the responsibility for the cost of his education, thereby helping his parents save money and allowing them to plan for their retirement. What are the precautions Saha should take before taking on an education loan? When can he start repaying the loan?



Anurag Saha should know that education loans are being encouraged by the government, and banks are willing to give loans up to a certain limit without asking for collateral or guarantees. However, the rate of interest on the loan will depend on the amount being borrowed, and collateral and guarantees can help bring the cost down. He can ask his parents to offer a guarantee or collateral, which should not be touched as long as Saha is prompt in his repayment. The education loan could cover not only the tuition fee but also living expenses. If Saha succceeds in finding an alternate parttime employment, he may be able to partly fund his education without resorting to the loan for all his expenses. By keeping the loan amount low, he can reduce the burden for himself when he begins to earn.

Many students believe that a default in the case of an education loan goes undetected. However, with the presence of credit bureaus, the repayment history can be easily tracked. Education loans are due for repayment only on completion of studies, and usually a moratorium of about six months is available to the borrower. Saha should be prompt in his repayment in order to ensure a clean credit record since it will help him access bank loans for other needs in the future.

He can also prepay or renegotiate the terms of repayment after he gets a job, depending on his income and repaying capability at that time.



(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre and Arti Bhargava.)