Educational loan : Tips To Manage Your Education Loan Burden

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Educational Loan
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Tips To Manage Your Education Loan Burden
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• 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
  EspÃrito 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 loans are 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
  parameters

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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.

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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,"

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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.

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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,"

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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,"

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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/moneyto
  day/banking/tips-to-manage-your-education-loan-bur
  den/story/189393.html

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