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Education earned with a loan, worth it?

by Money Puzzle   ·  September 20, 2019   ·  

Education earned with a loan, worth it?

by Money Puzzle   ·  September 20, 2019   ·  

Are you considering an education loan to fund that coveted degree course? The course is expensive. But then that’s what loans are for and you will have enough time to repay once you get a job. But hold on, what if you don’t get the job you are hoping for? Choosing the most appropriate academic course for higher education is perhaps the most perplexing choice one makes and not just thanks to the fees involved.

I was lucky to have monetary support from my parents when I wanted to do my undergraduate course overseas. I did have to work to support living expenses, but at least the tuition was paid for.

But this was two decades ago. If reports are to be believed, education inflation runs at roughly 8%-10% globally. Much higher than regular inflation in mainstream economies and even developing economies.

Whether you like it or not fees are going to go up substantially every year. Another factor for Indian students is the depreciating rupee. If rupee depreciation continues (which it will, even if at a slower pace), it just means that each year you will need more rupees to fund the same amount in a currency like US dollars, Pound Sterling, Euro or practically any other currency in the developed world!

Don’t need a loan if not studying abroad?

One may assume that this conversation is meant for those wanting to study overseas. However, that’s not the case. While Government funded college education in India is affordable for many, with first year cut offs in the 90%-100% range even till the last list – it is not accessible for many. The academically average student will have little choice but to pick a private institute, college or university – be it in India or overseas. Now fees start to look out of reach. Private college course fees in India itself can easily be upwards of ₹5 lakhs, that too for an institute which is not very reputed. Add to that living expenses, if you have to change cities and other extracurricular expenses and you are looking at an additional cost of close to ₹5 lakh for a three-year course.

It is true that rather than study at a low ranked private institute in India, many consider overseas education more favourable. Studying in the 100th or 200th ranked institute in US, Canada or Europe can get you better practical course knowledge and life experience than a mid-level higher education institute in India thanks to the non-rote structure of teaching and the cultural mix that one gets to be part of.

Nevertheless, whatever the choice is – chances are that it is going to be expensive – whether in India or abroad.

Is education loan an option?

Practically speaking, yes. These types of loans are very accessible. For smaller amounts, banks and lending companies will not ask for collateral and that makes it easier for students. Depending on the bank or lending institution you pick and your lending profile you can get a loan for anywhere between 8.5% pa – 18% pa interest. Repayment tenures are quite generous, again ranging up to 10-15 years.

However, here’s the thing. Firstly, you are going to end up paying a lot more than the cost of your course. For example, a ₹10 lakh education loan at 9% per annum interest rate for 10 years will come at an EMI of around ₹12,700 per month. Unless you pre pay the loan, you will end up paying slightly over ₹5 lakh as interest.

Undeniably, access to the loan can ease the pressure too. Many education loan providers will not only cover tuition fees but also living expenses in some cases, travel and stationery costs. This can significantly reduce the monetary burden for you. The biggest help is that repayment can start after you finish studying.

What you need to be careful about

Problems arise when you take a loan too large in order to fund an expensive course and then are not able to get a well-paying job. This happens often enough, pushing you to take up a job you don’t want to do.

From taking a loan to do your dream course which enables you to work at your desired job, your objective can easily turn to doing whatever it takes to repay the loan – if you are not careful.

To avoid this situation – keep in mind these important factors:

  1. Take a loan only if you can’t afford the most basic accessible course fee in the discipline you want to study in. Don’t compare your ability to pay the expensive course fees.
  2. Don’t pick the most expensive course in another city or country when you can afford the same thing where you live.
  3. Education loans are best suited for specialised courses as employability has a higher probability post such skill creation.
  4. Do the math before you take the loan. Work out the EMI and your possible salary post the course. EMI should be no more than 15%-20% of your expected monthly income.
  5. Avoid taking a loan because you want to go to that one prestigious institution that over charges because of its name.
  6. Work very hard to finish your course at the top of your class or at least in the top quartile. This can make the difference between your employability and your peers’ employability.
  7. Don’t pile on an education loan during recessionary times or when the economy is not doing well.

Leave me a comment if you have struggled to repay that education loan and got stuck because you were too quick to pick this seemingly easy option.

Think out of the box

Education doesn’t have to be formal and packaged under the crest of a 100 or 200-year-old institution. You can gain life skills and professional understanding in your chosen field through many outlets. These days, the digital platform has brought everything to your doorstep. YouTube videos are free, online courses offered by established institutions come at a much lower fee and these options also give you time to perhaps take up a part time job to gain experience.

Ultimately, life experience will get you the better jobs rather than the course you studied.

Don’t chase lofty education goals based on what others are doing. Build your own path.

If you are geared towards that one coveted institution and have been dreaming about it since you were 10 years old, your first choice should not be a loan, it should be trying out for a scholarship. You will have to work hard either way. So, don’t rush into an education loan. Plan in advance, calculate the consequences and consider the alternatives. Give up a year or two in favour of preparing for the test that will help you get in with a scholarship rather than choosing a big figure education loan that you can potentially struggle to repay.

Funding your education with a loan should be your last option, not your first choice.

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