Education loans: Myths that can derail applications, hurt credit score

From credit scores and co-borrowers to collateral, margin money and tax benefits, understanding these education loan misconceptions can help borrowers avoid costly mistakes

The Kerala High Court held recently that banks may consider the credit score and credit report of a parent or other co-borrower while assessing an education loan application. It rejected the students’ argument that lenders should consider only their future earning and repayment capacity. The ruling underscores that banks assess more factors than academic merit and earning prospects. Students need to get rid of this and several other common misconceptions about education loans. 

Career prospects and more assessed 

For high-value loans, lenders do evaluate the student’s future repayment capacity, the institution’s reputation, the course and its placement record. But these are not the only considerations. “They also examine the credit history and credit score of the student and, where applicable, the parent or other co-borrower or guarantor, along with their income, existing liabilities and other standard eligibility criteria,” says Raoul Kapoor, co-chief executive officer (CEO) at Andromeda Sales and Distribution. 

 He adds that if the parent or co-borrower has a poor credit score, a weak repayment history, or high existing liabilit-

ies, the lender may reject the application. 

Remember that the co-borrower shares responsibility for repayment. If the student defaults, the lender can recover the dues from the co-borrower. 

Costs covered 

Education loans cover tuition, books, study materials, hostel and accommodation charges. 

Additionally, they cover expenses such as overseas travel and mandatory equipment, among others. 

“Banks prescribe loan limits that vary for domestic and overseas studies. The loan is generally disbursed against actual expenses. Students may have to submit bills and other supporting documents before funds are released,” says Kapoor. 

Advertised rate: Not for everyone 

Not every borrower gets the lowest advertised rate. Lenders consider the applicant’s profile, the co-borrower’s creditworthiness, the course, institution and loan amount when deciding the rate. “Check whether the loan carries a fixed or floating rate. Compare the overall borrowing cost across lenders. Don’t rely only on the headline interest rate,” says Ankit Bagadia, director-business, BankBazaar.com. 

Margin requirement 

Margin money is the borrower’s share of the total education cost. The lender finances the rest. The requirement varies by lender, loan amount, institution, study destination and lender’s policy. 

“Before applying, students should understand the total cost of education and check whether any margin contribution is required. Some education-focused lenders may finance up to 100 per cent of the total cost for eligible borrowers,” says Yogesh Rawat, chief business officer–student lending international, Avanse Financial Services. 

Collateral a must? 

Collateral is essential in some cases, not all. “Lenders decide whether collateral is needed based on their credit policy, considering factors such as the loan amount, the applicant’s profile, the course and the institution. While some borrowers may qualify for unsecured loans, others may have to provide collateral as part of the credit assessment,” says Bagadia. 

Moratorium: Interest accrues 

A moratorium defers equated monthly instalments (EMIs) until the course ends or the specified moratorium period expires. But interest keeps accruing during this period. 

“Some lenders allow borrowers to pay the interest during the moratorium, helping reduce the overall loan cost,” says Bagadia. 

Default damages credit profiles 

Education loan defaults carry serious consequences. Credit bureaus record missed payments against both the student and the co-borrower, usually a parent. “A default can damage credit scores, making it harder to get future loans, including home loans. Government interest subsidy schemes also do not waive the repayment obligation. Education loans must be repaid like any other loan,” says Anooj Mehta, partner, 1 Finance, a personal finance platform.

 

(The writer is a New Delhi-based independent journalist)

 

Must-know facts about tax deduction 

• Claim a deduction only for interest paid, not principal
• Claim the deduction for up to eight years from the start of repayment or until the interest is fully repaid, whichever is earlier
• You can claim deduction only under the old tax regime
• Retain lender’s interest certificate if availing this deduction