Pitfalls to avoid while applying for an education loan

6 million rupees. That is how much I paid to get admission into the prestigious London Business School for my Masters in Business Administration. And thats just the admission and tuition fee. Add accommodation, travel, and living expenses, and my entire cost of education for two years came to a grand total of 1 crore rupees. Thats equivalent to doing an MBA from the top IIMs thrice. An increasing number of Indian students are pursuing undergraduate and postgraduate college degrees from abroad, despite high education and living costs. While managing costs for students whose parents have sponsored the courses or with scholarships is challenging, the ones who struggle the most are those of us who need to pay for it on our own. As a result, the only option we have at that time is to take an education loan.

Education loans can seem like a blessing for deserving students as they provide the money for fees/tuition expenses upfront, come at lower interest rates vs. personal loans, and can be paid-back after you start working. However getting an education loan or paying it back is not as easy as it seems and there are multiple factors that you need to consider to before applying for one or even making a decision to study abroad.

Here are some points to consider before taking an education loan:

Education Loans have become more expensive and difficult to procure: Due to a large number of defaults in the past few years, average bank education loan rates have increaseto 12-14 percent from 9-11 percent p.a. As a result, if you take a student loan of Rs. 50 lakh, you will now end up paying an EMI of Rs. 1.41 Lakh (@12 percent interest rate) as opposed to Rs. 1.24 Lakh (@9 percent interest rate) after two years. Whats more, all loans above Rs. 5 lakh require either a guarantor or security as collateral or both.

What you can do: Apply with parents as co-applicants to maximise your chances of getting a loan. In addition, ask your parents to check their credit scores before applying as their poor credit history can reduce your chances of getting an approval. If you are a working professional, research about company-sponsored post-graduation opportunities and see whether you are eligible to apply for them.

All universities do not offer high salary placements: While most colleges project high placement percentages and huge salaries to entice students, in reality these figures are ofteinflated – indicative of only the best placement packages and not a representative average. Additionally, some college degrees such as liberal arts and humanities inherently do not have a high placement package for freshers. As a result, you might have difficulty in repaying your loan instalments if you apply for these courses.

What you can do: Research about the available job prospects and part-time work opportunities that you can apply for after completing your course. One smart way of doing this is by speaking with alumnus within your network (time to improve that LinkedIn profile) as they can give you a more realistic picture of the college and placements than college representatives.

One education loan may not be enough: Most financial institutions have their own limit for giving student loans even with co-applicants and security. For instance, some public banks only give educational loans up to Rs. 20 Lakh for foreign universities. Moreover, colleges also require you to buy an insurance cover for foreign universities which might add to your overall cost.

What you can do: Create a detailed budget of all the expenses you will incur while studying abroad to be to apply for an education loan that best suits your needs. Ensure you factor-in items such as average salary packages, part-time work options, scholarships and student grants, as well as miscellaneous costs incurred which you havent accounted for (such as exchange programme or field trip). If you need more money but your education loan does not suffice, consider applying for personal loans online on marketplace lending platforms as they generally charge competitive interest rates without the need for security.

Current education loan will affect your future credit needs: A student loan is often the first credit that an individual applies for and thus forms the basis of his credit history. If you miss payments on your educational loan or default, it will affect your chances of getting other loans in future such as a car loan, home loan, or credit cards at a low interest rate.

What you can do: Apply for a credit card using a fixed deposit (ask parents to help you with this) and make small credit payments on time to create a good credit score. This will help you build a strong credit history and lower your interest rates when you apply for an education loan (even with a co-applicant). If you already have a credit card, check and improve your credit history first before applying for an education loan. A high credit history will also act as a safeguard if you miss your education loan payments due to unforeseen circumstances.

Education loan can be the ticket to your dream college and career. However it is wise to consider all the pitfalls and remedial advice before applying.

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