Student loans

Your Money: Easing the Student Loan Burden

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

Types of loans and repayment term
Higher education loans are available for full-time and part-time courses and even for working professionals. Basically, there are two types of student loans available. One is a collateral education loan in which the borrower pledges collateral to avail a loan. Collateral can be a house, non-agricultural land, apartment, fixed deposits, insurance policies, rated corporate bonds, government securities/bonds, etc. The second is the unsecured loan, under which the borrower is not required to give collateral. The non-collateral education loan is only offered for loan notes from Rs 4 lakh to Rs 7.5 lakh. But, the student and the financial co-applicant (usually the parents) must meet certain criteria such as income, CIBIL score, etc. Another important criterion for benefiting from these loans is the academic profile of the applicant.

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As for repayment, most banks offer student loans with repayment up to 15 years both in India and outside India for higher education. In any case, if the student does not repay the amount of the loan, the financial co-applicant is held responsible.

Repay interest during the moratorium period
The repayment of the study loan does not start immediately, it starts after the moratorium period, which is 6 to 12 months from the end of the course. Although repayment does not begin until the end of the moratorium, interest on the loan begins to accrue from the moment the first installment of the loan is disbursed.

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So, one of the best ways to manage is to start making payments for that interest while the student is still studying. Either the financial co-applicant, i.e. the parents, or the student, if working part-time, can start paying the interest.

Opt for a shorter repayment term
Although banks may offer loan repayment for up to 15 years, it is advisable to opt for a short-term loan. A shorter term may make you look like you’re paying higher EMIs, but it’ll save you a lot on the interest paid on your loan. However, the student should consider their net salary, living expenses, etc. while deciding on the duration and choose the shortest possible duration in which the student can get by.

Avoid Missing NDEs
Missing out on student loan repayments could hurt your financial reputation. This could possibly negatively affect your credit score and you could end up paying penalties, late fees, etc. It’s a good idea to set up direct debits from your salary account. This will ensure that there is no breach of IMEs and associated penalties. Regular repayments will also help maintain a healthy credit record. A good credit report helps in many ways when applying for loans in the future.

Vidya Lakshmi Portal
To assist all interested students to pursue higher education of their choice without any fund constraint, the Government of India has introduced a fully computer-based educational loan disbursement scheme through the Pradhan Mantri Vidya Lakshmi Karyakram. The Vidya Lakshmi portal (www.vidyalakshmi.co.in) IT mechanism provides students with a one-stop electronic platform for student loans.

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

The author is a professor of finance and accounting at IIM Tiruchirappalli. With contributions from A. Paul Williams, IIM Tiruchirappalli Research Staff Member