Mistakes to Avoid While Taking an Education Loan
Educational loans can serve as a crucial lifeline for deserving students, providing immediate coverage for tuition and various expenses. These loans typically feature lower interest rates in comparison to personal loans and they include the option to commence repayment after obtaining employment.
However, the process of securing an education loan and managing repayments can be fraught with challenges. Students frequently encounter several factors to consider, which can complicate their loan experience. This is especially true because many students make common mistakes that hinder their progress.
Let's look at the most common mistakes to avoid while taking an education loan:
1. Taking on Excessive Debt
Experts recommend that your student loan EMI should not exceed 10% of your expected salary. Before borrowing, calculate your EMI on a 10-year repayment plan, factoring in interest, and compare it to the average starting salary in your chosen career.
While some banks offer loans up to INR 40 lakhs or even INR 1 crore, such as ICICI Bank, taking the maximum loan available may not be wise. Remember, every rupee borrowed must be repaid with interest. Consider your total living expenses before deciding on the loan amount.
2. Overlooking Other Options
Always explore alternative avenues. Sometimes, students choose colleges with high tuition fees without exploring more affordable options that still offer quality education. It’s essential to strike a balance between career aspirations and the cost of education.
3. Misusing Loan Funds
It's common for students to spend loan money on non-essential items. Education loans are meant for tuition, hostel, and other educational expenses. Avoid splurging on expensive gadgets and manage your loan funds carefully.
4. Skipping Payments
Students may try to pay multiple EMIs at once and skip a payment, thinking it’s manageable. This can lead to financial strain in subsequent months, making it harder to meet payments. Missed payments negatively impact your credit score. If you’re struggling to make payments, consult your lender rather than skip installments.
5. Failing to Read the Fine Print
In a rush to secure a loan, many students skip reading the fine details. This can lead to taking out expensive loans that don't cover all the necessary expenses, increasing financial strain. Ensure that your loan covers tuition, textbooks, accommodation, and other educational costs.
6. Not Comparing Loan Options
Different banks and NBFCs offer varying interest rates on education loans. Failing to research thoroughly can lead to missing out on better loan terms. Compare interest rates and fees from multiple lenders to find the most affordable repayment plan.
7. Ignoring Early Repayment
Many students don't consider early loan repayment, not realizing that paying off the loan early reduces the overall interest and total amount owed. Prioritize prepayments to save money in the long run.
8. Providing Inaccurate Information
Always be truthful when filling out loan applications. Falsifying information can lead to serious consequences, such as losing the loan, facing fines, or even legal charges. Schools often audit financial aid applications, so it’s crucial to be honest.
9. Believing All Universities Offer High Salaries
It’s essential to research the placement record of the university you’re applying to. Some colleges advertise inflated placement figures to attract students, but the actual average salary may be much lower, making loan repayment difficult.
10. Not Considering the Moratorium Period
The moratorium period is the time given to start repaying your loan after completing your course. This period could be six months after finding a job or one year after course completion, depending on the loan. Some loans with lower interest rates may not offer favorable moratorium periods, so keep this in mind when choosing a loan.
Although education loans serve as a valuable resource, they necessitate careful planning and management. To ensure a smoother repayment process, always compare loan options and stay informed about repayment schedules. Prioritizing financial responsibility is crucial, because it helps to minimize debt stress after graduation.
