By Shweta Khanna Bhandral
Career Counsellor & Founder, The Future Skills Company
A better life is not only about dreams, passion, and a right career choice but also money and sometimes a lot of it is required. However, if you have the first three things sorted money should be the least of the problems, with readily available education loans today. Almost all the banks today are offering an education loan.
But before you take the plunge, you must answer these three questions-
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When to take education loan?
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How much education loan to take?
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How does education loan help?
I spoke to a few professionals who are now doing very well for themselves. All of them took education loan at different stages of their education and career.
While most students in India take an education loan for their postgraduation or going abroad. Dheeraj Khanna had to take a loan for his graduation. He says, “I would not advise children to take an education loan for graduation unless it is the only option left.” At the same time, he also tells us that, one good thing that education loan does is initiate the habit of saving. “Initially managing EMI and monthly expenses with the salary was difficult, but gradually it became a habit. Even after paying off the EMI, the saving continued,” says Dheeraj.
Education loan is an excellent way to make the child take on responsibility and understand the need to manage personal finance. In a way, it is good debt. A debt that is helping you to not only invest in yourself for a better future but is also teaching a good habit like saving.
While taking an education loan, you must keep three things in mind:
1) Understand how the course will help you
First, the course you are taking up should be worth the time, effort, and money. It would help if you researched enough about how your growth prospects will change for the better after the course. Gauge the post-course job scenario and arrive at a decent ROI figure.
2) Check the credential and reputation of the Institue where you are planning to go
You should gather all the information about the institute where you intend to study. Is it good enough? Do companies recognise the institute/course? Please find out about the alumni and talk to them about the institute.
3)Do your Math
Must understand the cost of the course. Do the financial calculation depending on the current pocket and future earnings. Do not forget to prepare yourself for the worst-case scenario, like an economic crash.
Vikas Kapoor, who took an education loan for his MBA, believes that education is an investment. He says, “It is something which can give you a decent return on investment for a lifetime. A better salary, different job function, premier institute tag/alum and a reliable network, which can all help you in your growth. And hence taking an education loan (the interest on which is not high), makes a lot of sense. If you get a good salary hike (40-50% is minimum), with paying only 7-8% post-tax benefit interest, the math is for you to decide.”
Vikas took a loan after working in the IT industry for about five years. With a need and desire to upskill himself Vikas considered all his options, looked at the course fee, duration, employability, probability of admission and location. He then chose a premier institute with a moderate price in India rather than going for a mid-average institute with higher fee abroad. His saving was not enough to fund his MBA, so he took a loan of 70% of his course fee. Did his loan become a burden for him to pay back? Vikas tells us, “the education loan rates are not too high in India and the repayment period is also longer (my case was seven years max). Long term payment equates to lower EMIs, which are easier to pay. Interest on education loan gives you a deduction on your income u/s 80E of IT act, which also helps. I got a decent increase in salary post my MBA; hence it wasn’t a burden to pay back the loan.”
Two things that you should not do when taking an education loan.
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Going in for the maximum loan is not a good idea. The more money you loan from the bank, the more time you will take to repay it with interest. Make it a point to sit down and calculate how much borrowing should be enough for you.
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You need not necessarily take a loan from first ones to offer, or with the bank that has a tie-up with the institute. Compare what different banks have to offer. Go for the one with the lowest interest rate.
Taking a loan for studying abroad is a different ball game altogether. If a child wants to study overseas after 10th, then the burden of loan comes entirely on the parents. The college/university education is expensive abroad, so one must encourage the child to aim for a scholarship. Also, evaluate if going abroad is worth it. If you have not planned for your child’s education from early on, it could be very tough to arrange funds and any such loan could put a big dent on your retirement plan.
World over education loan is the most significant contributor to consumer debt, second only to the home loan. This trend is catching up in India since more and more children want to pursue their higher education from abroad.
Depending on your course and available funds what you borrow can be anywhere from $30k to $150k. If you borrow a considerable amount, you might have to cut down on a lot of expenses to pay back the loan. Shaishav Singh tells us, “In my case, I was able to save more in 2 years than what I spent in my two years of education. I was positive on return on investment.” The caution you should take here is pick up a loan with the worst-case scenario in mind. Shaishav explains further, “I had options of better-ranked universities which were more expensive, but I opted for a lower-ranked with a decent program where I had scholarship just because I did not want to borrow what I cannot pay.”
Follow some personal finance discipline once you get a job. Saving money to pre-pay the loan sooner should be your goal. There is nothing better than a debt-free life.
