Educational Loan

Tips To Manage Your Education Loan

Burden

Education is expensive, especially if one is aiming for a

premium institution or a foreign degree. Education loans can
be a big help.
According to Google AdWords Keyword tool, used to track
internet search volumes and advertising, over one lakh people
from India key in the words 'education loan' or similar phrases
every month on the search engine.
Student loans have grown more than ten times since 2004,
when they were introduced in the Union Budget by then
Finance Minister Yashwant Sinha.
A report by Esprito Santo Securities reveals that education
loans grew 35 per cent annually between 2004 and 2012.
Banks expanded overall credit by 23 per cent in the period.
Education loansare part of the priority lending category
(along with housing loans). The government insists the facility
should not be denied to any student who meets the

DO NOT DEFAULT

Along with an increase in lending over the years, there has

been a sharp rise in the number of defaults.

A default spoils the credit score of both the student and his
parents (usually co-borrower). If equated monthly instalments ,
or EMIs, are overdue for 90 days, the bank classifies the loan
as a non-performing asset. The borrowers will not only come in
the bad books of banks, if the loan amount is higher than Rs
7.5 lakh, the collateral will be at risk as well.

CAPITALISE ON
PROVISIONS
Student borrowers get many relaxations. These can be used to make
the repayment smoother.
Start by reducing expenses. Margin money-a percentage of expenses
that you pay while the bank pays the rest-is required on all loans above
Rs 4 lakh. The rule is 5 per cent for studying in India and 15 per cent for
studying abroad. However, many banks relax this rule for meritorious
students.
Women can seek a lower rate as they are eligible for a 0.5 per cent
concession. Banks also have special schemes, including interest
subvention, for economically weak and differently-abled students.
Also, the fee is usually paid in tranches. "If possible, do not take the
entire loan in one go but in instalments. This will reduce the interest
burden,"

MAKE USE OF THE MORATORIUM

PERIOD
Repayment does not start immediately. The extra time can be used to
build a corpus. "The money can be either used for partial pre-payment
or EMIs,
You can also repay some interest during the study period to lower
EMIs. The bank starts levying interest from the time of disbursement
at the end of each course year or semester. The amount keeps
adding up, increasing the debt burden.
However, if you pay simple interest on the principal during the study
period, your EMIs will be reduced to a large extent. Many banks also
give a 1 per cent interest concession to those who repay the interest
debited during the moratorium period.

PAY AS YOU EARN

It will be nice if your bank gives you the option of income-linked repayment.
Some education loan programmes in the US offer an income sensitive
repayment model where EMIs increase (or decrease) with income. At present,
the Indian Banking Association's model education scheme has no provision for
this.
"Monitoring changes in compensation of such a large number of borrowers on
an ongoing basis is difficult for lenders,"
However, a similar but simpler model may soon be available. Data show that
salaries are usually low in the first three years of employment and rise fast
after that.
The new system will, therefore, allow you to pay less in the first few years and
more later. "This step-up EMI model will be easier for banks to handle and is a
possibility in the near term,"

TAKE CARE OF RATE FLUCTUATIONS

The interest rate is typically the base rate plus a fixed
spread, say 1-2 per cent, that varies from bank to bank. So,
it is a floating rate loan.
If you are earning enough and are able to save some
money after paying the current EMI and other expenses,
use the spare money to create a buffer in case of any
increase in interest rate.
"A sufficient surplus should be maintained (at least three
instalments) so that EMI servicing continues unhampered
even in the event of a spike in expenses,"

WHAT IF YOU DON'T GET A JOB?

Banks extend loans based on the capacity to repay. This is usually based on the employment
potential of the student after completion of the course. However, what if the market is down and
the borrower fails to get good income or a job?
Usually educational loan have tenures of five-seven years. However, as per the guidelines, the
tenure can be extended up to 10 years for loans up to Rs 7.5 lakh and 15 years for loans above it.
An extension of the moratorium period is allowed in case the student takes up higher studies
immediately after completing the course.
"The commencement of repayment will be shifted to six months from employment or one year of
completion of the course, whichever is earlier, without treating the change as restructuring. This
will be irrespective of whether the student has taken fresh or top-up loan for higher studies or not,"
Source : http://www.businesstoday.in/moneytoday/banking/tips-to-manage-your-education-loanburden/story/189393.html

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