Published: 09th April 2018
Paying your education loans may get more difficult. Here's why
As per Care Rating report, the growth rate of education loan declined to two per cent in 2017 from 17 per cent in 2015, while NPAs of PSBs in the segment increased from 5.7 per cent
Cost of higher education has gone up by leaps and bounds in the last decade as private institutions mushroomed like never before. Often, they charge hefty amounts from engineering and management disciples, but not necessarily guarantee them placements. Students who have availed education loans are finding it difficult more than ever to repay them.
As per a recent Care Rating report, the growth rate of education loan declined to two per cent in 2017 from 17 per cent in 2015, while Non-Performing Assets (NPAs) of Public Sector Banks (PSBs) in the segment increased to 7.7 per cent from 5.7 per cent during the period. Ministry of Finance had earlier informed that total value of PSBs’ non-performing loans in the education sector has grown from Rs 3,536 crore in March 2015 to Rs 5,192 crore in March 2017.
The overall education loan portfolio is about Rs 80,000 crore comprising mainly of scheduled commercial banks (Rs 73,000 crore), cooperative Banks (Rs 2,000 crore) and NBFCs (Rs 5,000 crore). The report emphasizes that not having any collateral against small window loans (below Rs 4 lakh) as per the IBA scheme and lower employment opportunities after completing such courses are the major reasons why loans are unpaid these days. As per the RBI data, a majority of education loans distributed are within Rs 5 lakh. Thanks to NPAs, banks have now tightened up measures when it comes to granting loans. “We discourage applicants of education loans due to the market conditions.
We fast forward the process only if the applicant is going in a top-class category. Else, we don’t feel confident lending to someone enrolled in a private college,” an SBI manager, requesting anonymity, said. What also makes education loans unattractive is the higher interest rate of 12-14 per cent, more than car and home loans. If you take a loan of Rs 20 lakh at 12 per cent interest, to be repaid over 10 years, you might end up paying between Rs 10.50-11 lakh in interest, assuming there are no processing fee or hidden charges. Experts say proper long-planning is the key. For example, investment in mutual funds or even in Unit Linked Insurance Plans will help the investor meet the education expenses.
However, it is important to evaluate the child’s education expenses first and plan for the costs at a projected level by basing the calculations on the current costs. If your investment period is more than 10 years, it is also advisable to split your investment between mutual funds and secured bonds. This split not only gives the advantage of compounding interest, but also a security on the partial investment. Within mutual funds, people can also look at the Systematic Investment Plan (SIP) as they can invest in a mutual fund scheme that aligns with their goal.
However, it is most advised to consult a subject expert before taking the mutual fund route. Apart from that, parents can also look up to child plans. Although child insurance plans are costlier, they will serve your child’s interests better in the long term. Many reputed companies provide child plans, but even that requires evaluation as to which is the best-suited. If all the measures are exhausted, parents can look up to education loans, but should not forget to read the terms and conditions in detail.
Education loan is the first loan taken by a student in his/her name, so it is important to ensure steady repayment and maintaining of a good CIBIL score. Unless the repayment track record of education loan is clean, there is a risk that the student might face challenges in availing other loans later.