Busting the Myths Around Student Loans

Finding the right education loan requires time and research, and many are still skeptical of their advantages

Busting the Myths Around Student Loans
Busting the Myths Around Student Loans
Ankit Mehra - 11 May 2021

Education loans act as saviours for many and have become crucial to finance higher studies. Be it in India or abroad, there are various loan products offered by public and private lenders to make it possible for students to pursue higher education.

However, there are still people that are sceptical about taking education loans. The myths around the education loan segment only cloud their judgment further. In this article, we will bust some of these myths and misgivings that are attached to education loans to make the concept of student loans easier for prospective borrowers -

I shouldn’t start my career with a debt as big as an education loan

This is one of the biggest concerns of students and parents. Starting your career with debt is, guaranteed, not an ideal picture. However, there is a difference between good debt and bad debt. Good debt will potentially help you increase your income over time and enhance your living standard. Bad debt, on the other hand, involves investing your money in things with depreciating value. Education loans finance your education and education makes you more employable, increasing your income over time. So, starting your career with an education loan? Good debt. It also helps in creating a good credit history if you repay on time.

I won’t be approved for a loan as I don’t have a good academic record or collateral

Another myth that discourages students from applying for a loan. A good academic record and collateral will increase your probability of getting a loan, however, there are alternate choices as well. The best option is an unsecured loan in case of unavailability of collateral, that is education loan without collateral offered by several lenders in the market. Students need an earning co-applicant with a good credit history to apply for a loan without collateral. Apart from these factors, target college, course, and the future earning potential of the student are also taken into consideration. For example, getting into top-ranked colleges and universities certainly increases the chances of loan approval even if the academic record of the student is average.

There are no loan products for upskilling/vocational or online courses

Gone are the days when the education loan segment was restricted to financing just undergraduate or postgraduate courses. Now, there are different types of lenders with varying loan products for short-term financing needs. Students need to expand their field of search and move beyond the traditional lenders to look for an optimum product. Various FinTech companies, such as GyanDhan, Eduvanz, are offering financing options for upskilling/vocational courses, school fees, college fees, and short-term courses. These Digital Non-Banking Firms are covering smaller sectors of the education loan market to help students fund their education goals without paying out of pocket huge sums of money.

Personal savings are better than education loans

Often people choose to self-finance their education using family money or emergency funds or even liquidating assets. But consider this, you are using your contingency funds in a single shot, which could have been otherwise used to strengthen your financial situation. A prudent financial decision would be to invest personal savings and funds in lucrative schemes so that you can earn interest and make a profit on it. For example, investing Rs 10 lakh and earning 10 per cent per annum is equal to Rs 1 lakh. At the same time, there are education loans with interest rates as low as 8 per cent. Smart investing can help you make money while simultaneously funding your education. But you lose this opportunity the minute you use personal funds for your education. With an education loan, your tuition fee is paid on time with zero worries, and you get additional tax benefits, wherein you can claim tax deductions on the interest paid on an education loan in a financial year.

I shouldn’t worry about the loan until I graduate

Students often believe that repayment of the loans will and should start after graduation. Several lenders also offer a moratorium period to mediate the financial burden on a student, wherein the repayment starts after the student secures a job. However, students should keep in mind that interest is charged the minute the funds are disbursed. During the study period, simple interest is charged, which is compounded after the student graduates. The ideal time to repay the loan depends on your financial situation and planning. Nevertheless, it is financially prudent to start paying the loan when the interest is simple and not compounded. Plan your loan repayment with an EMI calculator to avoid unnecessary financial burden.

The market is swarmed with loan products and lenders. Therefore, education loans require time and research to find the right product. They may not be the optimum choice for everybody but students should not get bogged down by these myths. Consult with the right people, compare and explore loan products, plan your finances, and then make a decision.

The author is Founder and CEO, GyanDhan

DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.

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