Education Loan: Challenges And Opportunities

Higher education is necessary for this day and age for better opportunities in life, developing essential skills, and increasing earning potential. Education loans are the easiest and readily available option to finance higher education. 

Student loans come with their own responsibilities. Let’s unpack some of these challenges and opportunities.

Challenges

Only approved list of schools and courses are eligible for student loans

This is a major challenge that students face, whether to study in India or abroad. Lenders generally rely on the student’s ability to pledge collateral, a co-applicant, and in some cases, the ranking of the target college/institute to judge the loan application. Finding suitable education loans for vocational and upskilling courses is also a challenge many students face. In the case of these short-term courses, students find financing options only if the institute has tied up with a lender or a FinTech company, like GyanDhan. 

A major setback in education loans, currently, is that most lenders look over future employment and potential future earning as a factor to evaluate loan applications. A student enrolling in a high-value course or a good college might find it difficult to find a loan product because the institution doesn’t fall on the list of approved schools or courses. Loan products should be structured based on the future earning potential of the student - a factor that will be beneficial for both, the lender and the borrower. To gauge this, multiple factors will be taken into account, such as the student’s academic record, work experience, target college, and course, etc. 

No standard measure to compare different loan products

For traditional degree courses, students usually settle on a lender or a product without exploring and comparing them, which might result in a loan with a higher interest rate or processing fee. For vocational and short-term courses, loan products are mainly available if the institute has partnered with a lender. However, a good practice that every prospective borrower needs to carry out is exploring and comparing different loan products and lenders. 

Most students falter at this step, as every loan product is structured differently with no standard measure across products to calculate the total cost that a student has to bear. Another factor that impacts students is the unawareness of varied loan products. 

To overcome this challenge, lenders need to look at their western counterparts, who have an Annual Percentage Rate (APR) that helps students understand the cost of the loan beyond the interest rate. This makes the process transparent, makes comparison easier and is a step towards responsible lending. Students also need to make an effort to explore their options. They can avail the help of trained professionals and marketplaces are equipped to handle such a task because of their experience. 

The loan process is opaque and lengthy 

Students face multiple roadblocks in the entire loan application process from start to finish. There are several document submissions, collateral documents, and formalities that delay the decision. And since, as mentioned in the above point, there is no standardization in the loan products and process, it also impacts the decision taken on the application. The decision on the same loan application might vary from city to city, branch to branch. 

The only possible way to overcome this is to standardize the product and the process so that the decision made is objectively based on concrete calculations. 

Opportunities

Loans help in advancing career

Whether it is a degree course or an upskilling course, education loans help you finance without worrying about paying large sums of money out of pocket in one go. One of the best features of an education loan is the expenses covered, which includes tuition fees, living expenses (if any), purchase of equipment, travel expenses (in any), etc. Students can choose the right career for themselves and finance with the help of an education loan. 

Loans help save money

There are multiple tax benefits of taking an education loan. For example, under Section 80E of the Income Tax Act of India, interest paid in an education loan can be claimed as a deduction. Another benefit of taking an education loan for abroad studies is that TCS on foreign remittances for education is 0.5 per cent on amounts more than INR 7 lakhs in a financial year, which otherwise is 5%. Students can further invest their personal / contingency funds in schemes with a higher ROI.  

It helps you build a solid credit history

Repaying education loans help students build a credit history as well as become financially responsible. A good credit score reflects the financial credibility of the student, increasing their ability to get future credit at better terms and conditions. Home loans, credit cards, and other forms of credit would be easily available at lower interest rates, helping them save money on interest rates on big-ticket loans.  

Ankit Mehra

Guest Author The author is the Founder & CEO, GyanDhan