The burden of education loan

Avoid over-leveraging with low job market; starting with default will hurt future loan options

With the cost of education rising, more students seem to prefer education loans. But, many are finding themselves without jobs, even after paying for expensive education.

According to recent reports, the total education loan dues in the banking system had risen from Rs 48,382 crore to Rs 72,336 crore, a rise of 49.5 per cent, between March 2013 and December 2016. In comparison, non-performing assets in this segment was up 142 per cent, from Rs 2,615 crore to Rs 6,336 crore in the same period. Clearly, more and more students are finding it difficult to service loans. 

  

What is interesting is that the number of students heading abroad for higher education has been rising consistently. For example: Data from EducationUSA — a US Department of State network of international students advising centres in over 170 countries — show the number of students from India registered the highest growth in the past two years, increasing 24.9 per cent in 2015-16. In terms of number of students, India is second only to China, with the latter having 328,547 student compared to the former’s 165,918.  

 

Obviously, many parents would be over-leveraging themselves in the hope that their children would get jobs with fat salaries — something that hasn’t been happening for some time. And, given the Trump administration’s focus on enhancing job prospects of US citizens, things could continue to remain bad for more time. Even in India, job growth hasn’t been happening at exponential rates to accommodate the influx of new entrants. 

“The slowdown in information technology has meant this industry, a major recruiter of engineers, is hiring far fewer people than it used to. Low capex and credit growth figures indicate corporates are not expanding capacity. Job creation in manufacturing has also been below expectations. Also, engineeand MBAs graduating from lower-rung colleges are finding it difficult to get well-paying jobs, and hence the defaults,” says S G Raja Sekharan, who teaches wealth management at Bengaluru’s Christ University.

Interestingly, defaults are happening even in small-ticket loans of below Rs 7.5 lakh where no collateral is required, or less than Rs 4 lakh, where a guarantor is not a prerequisite. Ajay Bohora, co-founder, managing director and chief executive officer (CEO) of HDFC Credila Financial Services, points to the operational difficulties before lendein keeping track of borrowers. “Frequent changes of addresses occur within a short span, when a student moves from one location to another for a bachelor course, then changes city or even country for a Mastedegree, and again for a job. All these changes take place within two-six years. This makes tracking of students extremely challenging,” he says.    

Overstretching to fund foreign courses: Studying abroad can take a heavy toll on a family’s finances. “An engineering course can each year cost you $35,000-60,000 (Rs 22.5-38.6 lakh) in the US or $40,000-50,000 (Rs 20.36-25.45 lakh) in Canada. This is just the tuition fee. Add another $10,000-12,000 (Rs 6.4-7.7 lakh) for accommodation, food and other expenses,” says Neeraj Khanna, co-founder and director, Spark Career Mentors, a Bengaluru-based education consultancy.

Khanna says he has come across cases where parents have had to sell their only house to fund their child’s education. Such things, he says, happen to parents who are under the mistaken impression that foreign countries offer unlimited opportunities, and once their child arrives there, he will be able to figure out a way to make good money.

Choose your course carefully: A lot of research must go into choosing the right country, course and college. “Students and parents must evaluate various countries and courses and their potential employment prospects amid the current environment of global uncertainty,” says Bohora. Khanna suggests that students should read extensively about the prospects of the industries they are aiming to get into. According to him, someone majoring in computer science, design thinking or human-centred design, data analytics and certain branches of economics stands a good chance of finding a job in the US currently. Opting for a STEM (science, technology, engineering and mathematics) course, he says, also enables a student to stay on for longer in the US to search for a job after completing the course.

Stress-test for worst-case scenarios: Bohora suggests that scholarships and family savings should be the first recourse of students, and education loans should only be used to bridge the gap thereafter. Students and parents should also weigh their repayment capability before taking a loan. “Parents must stress-test their finances for the worst-case scenarios and see whether they will be able to bear the loan burden,” says Anil Rego, CEO, Right Horizons, a Bengaluru-based financial planning firm. It could take the student longer than expected to get a job, or the salary may be below expectation. Sometimes, says Rego, students stay over for three-six months after completing their course to continue their job search in that country. Given the high cost of living in the developed world, this could translate into an extra burden of a few lakh of rupees for parents. Parents must also check if, in the worst case, they will be able to fund their child’s education without having to dip into their retirement corpus.

Smart strategies: While the child is studying, parents should keep paying the interest on the loan. “Evaluate the flexibility to part 

pre-pay and pre-pay the loan to reduce the overall interest burden,” says Amit Gainda, CEO, Avanse Financial Services.    

Parents must make the child a part of the entire financial planning that goes into funding his higher studies. “If the child is kept in the loop, he will be on the lookout for opportunities to earn through part-time work, both during and after the course,” says Rego.

Avoid a default: Education loans usually have a tenure of five to seven yeabut can be extended to 10-15 yeafor loans above Rs 7.5 lakh. Choose the tenure based on assessed repayment capacity. “Banks can also extend the repayment period based on their discretion if the macro environment is unfavourable for students to get a job. However, such relief is subject to the lender’s policies,” says Harshala Chandorkar, chief operating officer, Transunion CIBIL. Repayment usually starts six months after the student gets a job or one year after the course ends, whichever comes earlier. A default on this loan will affect the student’s credit score and his ability to get other loans in the future.      

For loans above Rs 7.5 lakh, lendeask for collateral. Parents stand the risk of losing it in case of a default. Anyone planning to stand guarantor for a relative should do after due consideration. “I have known cases where borrowehave disappeared after going abroad, leaving their guarantoin the lurch,” says Rego.