A type of loan which has been designed to help the students pay for their higher education which can be either domestic or international is known as a ‘Student Loan‘. It covers the expenses such as tuition, books, supplies and living. This is different from other types of loans because the interest rate is comparatively lower than the interest rates of other loans. The repayment schedule of the loan is also different if the student is still in school. There are strict laws in various countries which regulates the renegotiation and also the bankruptcy.
In India, the Government has specially launched a portal for the students who are seeking for educational loans called ‘Vidya Lakshmi’. This portal is an integration of 5 banks with their system. This portal was started solely to help the students who wish to study ahead but aren’t able to generate funds.
The Student Loan in India was developed under 3 departments – Department of Financial Services, Department of Higher Education and Indian Banks Association. The portal was introduced in the FY 2015-16. Around 37 banks have been registered on the portal offering around 137 loan schemes.
There is also a portal called ‘Vidyasaarathi’ which was launched so that students get scholarships if they want to do their studies in India or overseas.
Types of Student Loans
Having different types of educational programs means having different types loans provided for that specific program. From skilled courses to getting a diploma or to do a certificate course, in India, there is a provision for student loans.
1) Domestic Education Loan
This loan is specifically made for students who wish to pursue their education within the limits of the country. The people taking the loan have to be eligible according to the criteria which is basically the student needs to have a secured seat in an institute which meets the requirements of the lenders.
2) Study Abroad Education Loan
If the Student wishes to do a certain course in a university outside India but isn’t able to afford it, they can apply for the Study Abroad Loan if they are eligible. Just like the Domestic Loan, if the student has a secured seat from the list of the eligible educational institutions then the loan will be approved.
3) Graduate Student Loan
This loan is specifically for students who wish to study and get more educated in institutions but only within India. This is basically for those students who wish to pursue their post-graduation degree. The only criteria to be eligible for this loan are that the student should have completed their undergraduate degree.
4) Undergraduate Student Loan
The proper financial support for the student to pursue their undergraduate degree is what this loan provides. After completing their undergraduate program, the student gets various job opportunities which is helpful for them.
5) Professional Education Loan
These are loans which are provided by various Banking institutions and NBFCs to students who are willing to have a career in education.
6) Loans for Parents
This is type of an unsecured loan which given to the Student’s parents if they wish to fulfill their child’s education but aren’t able to afford it. These expenses are mainly tuition, books, living, uniforms and other miscellaneous expenses. The people eligible for this loan are not only the parents but can also be other adult relatives of the students. They can enroll their children in secondary, military, religious, private and non-public schools across the country.
7) Career Education Loan
This loan can be availed by Students opting to do an undergraduate degree course in programs such as trading, technical schools and colleges across the nation.
Advantages and Disadvantages of taking a Student Loan
Taking a student loan anywhere for further studies has its pros and cons. Because over the years, the quality of education has widened. With the increase in the quality, the cost of getting that quality has also increased. There are more and more fields getting introduced in colleges or universities every year.
Here are some Advantages of taking a Student Loan
1) Educational Loans are for all classes
Whatever and wherever the person might be from, any caste, any creed, rich or poor, they can apply for the loan. Because there is no discrimination when it comes to education.
Once the student gets a certain freedom, but having the point having taken a student loan, the student gets a sense of responsibility and starts saving and spending wisely from the start of their career.
3) Easy Availability
If the documents get thoroughly verified, then the Banks or Private Institutions avail the loan easily and quickly.
4) Low Interest Rates
Since the rate of interest on Educational Loans specifically are low, it makes it easier for the Students when they have to repay it.
5) Tax Benefits
There are taxes which have to be paid when someone takes a loan but when it comes Educational Loan, there is a tax benefit on it. This way the saved amount can be invested somewhere else.
6) Moratorium Period
After the student has completed their education, instead of the repaying the loan instantly they get a holiday period known as Moratorium period which allows them to start repaying the loan once they get a job in any company. If a special request has been made, then the student gets an extended period to pay their loans.
7) Special Provisions
In India, there is a special provision which has been made specially for girls and people with a disability wherein public banks offer an interest subsidy of 0.5-1% on Educational Loans.
8) Self-funding for the Dream School
With the help of a Student Loan, a student can apply in the school that they have always wished to be in so that they can achieve the dreams that they always desired.
9) Better College Experience
The best part about having a Student Loan lets the student focus on their education rather than thinking about their expenses. This gives the students a proper experience of college which would help them learn whatever they can.
10) Credit Building
Paying off the Student Loan can help the Student to build a good credit score which will help them become trustworthy towards the bank. In return, helping you for any financial crisis in the future.
11) Easy Access to Education
Once the Student Loan has been availed, it gives accessibility to education and higher education to the students giving them the option to study what they want. As education is already getting expensive as time changes, having an education loan makes education more accessible.
Disadvantages of taking a Student Loan
1) Asking for a Marksheet
Before disbursing a loan, the banks ask for the marksheet of the students because to cross-check whether the student has a good academic record.
2) Floating Rate of Interest
Depending how the economy is presently, the rate of interest starts floating as time changes. The rate of interest differs from bank to bank and depending on which type of loan has been taken.
3) Requirement of a Guarantor
When it comes to a loan, a guarantor is required if the loan exceeds the amount of 4 lakh rupees.
4) Denial of Loan for Certain Colleges
A student when they apply for a loan, can be denied if the banks feel that the colleges they had chosen will give the student the employment which will help them in repayment.
5) Changing of Course/College
Certain banks don’t allow the student to change their course or their college after they have reimbursed the loan. But it is still better to check with bank before applying for the loan.
6) Post-College Debt
Taking a Student Loan also has an after effect to it. If plans didn’t go according to what was expected than the students would then have a post-college debt because the student loan they had taken and weren’t able to get a job post-graduation.
7) Late Payment Penalty
Once the student loan has been taken and if during the repayment, if there are missed payments, there are penalties which get charged such as interest, higher fees or wage garnishment. This will have a rippling effect as it will also affect the credit score.
The pros in a situation of Student Loans always overpowers the cons. This factor helps the Students to focus on their career goals and work accordingly.
Consequences if you don’t pay the Student Loan
When a Student or their family decides to take loan for the further studies, there are often times when they aren’t able to repay the loans at the given period, there are certain consequences which they have to face when something like this happens. In India, the lender will send notices to the borrower and the guarantor (if there is one).
The borrower will then become a defaulter if they ignore the notices that had been sent. The credit score will also have a big impact. Because this will also affect you in taking loans in the future.
When a Student takes a loan so that they can study abroad, they are given a due date by which they have to repay the amount through EMIs. Once the student misses the first payment, the lenders usually report to the credit bureau which in return reflects as a Due Past Date (DPD) on the credit report.
If the EMI isn’t paid after 30 days then, the Lender starts applying a penal interest after reporting to the credit bureau. This is an extra penalty interest which is added to the normal interest rate. Public Banks charge 2% interest annually whereas Private Banks and NBFCs charge 3-4% interest rate annually.
But if it crosses the 90-day mark, the Lender than declares the borrower as a Non-Performing Asset (NPA) which means now the Lender has given you the tag of a Defaulter. This brings a drastic change to the credit report which also impacts your credit score deeply.
Measures for Recovery
There are often misconceptions when it comes to the timely repayment of a Student Loan. Students feel that they will be tormented by their Lenders or the Lenders will take their collateral security away. But in an actual situation, when the students fail to repay their educational loan, students get enough time and they will get chances before the bank takes an action like confiscating or auctioning the collateral.
There is a Soft Recovery in which after 90 days, the student start receiving calls from the lender to make the payment. The lenders will also be issuing a letter of warning. In this process, government banks don’t usually call and harass you but Private Banks and NBFCs do. Since Private Banks and NBFCs don’t take collaterals whereas Government Banks do. In a Soft recovery, if the payment of EMIs are made, then you will be removed by the lender from the NPA status.
Hard Recovery occurs when the payment of EMIs hasn’t commenced. Government banks will send you a notice which will state that if the payment is not made, then the Government will sell your collateral. If this is ignored, then the Bank will go ahead and put your collateral on an auction. Finally, if even after 6 months, the Bank will tell you make the final payment and if there isn’t any response, the bank will auction the collateral and take the amount they get after they auction the collateral.
In Conclusion, take a Student Loan only after having a proper knowledge about what you are getting yourself into. Otherwise, it can backfire and you will end up paying more than what you had taken.
If you don’t pay your student loans, your credit score will be negatively affected and you may face legal action.
Yes, in some cases, your wages may be garnished if you don’t pay your student loans.
No, you cannot go to jail for not paying your student loans. However, you may face legal action.
The interest rate on student loans is generally lower than other types of loans.
It is possible to discharge student loans in bankruptcy, but it can be difficult and is not guaranteed.
Yes, there are options for temporarily postponing payments on student loans, such as deferment or forbearance.
Eligibility criteria for taking a student loan may include having a secured seat in an eligible institution and meeting certain income requirements.