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Higher education requires intensive planning. Not only from the perspective of securing admission to prestigious universities but also from the perspective of finances. The cost of education has skyrocketed to the point where parents need to take an education loan even for higher studies in India. Several unexpected setbacks are bound to increase the cost of education that borrowers often fail to consider. Let’s look at the four factors that are currently troubling student loan borrowers and should be taken into account by future borrowers –
Inflation: Inflation has increased the cost of education while the minimum wage remains the same. Coupled with the falling rupee and RBI’s reaction to counter inflation by hiking the repo rate has made things quite difficult for the young borrowers. The worsening economic conditions mean larger loans, bigger EMIs, and an unstable job market. To tackle this, students should select a suitable education loan, consider non-traditional countries for higher education offering quality education that meets their goal, like Germany, France, or Spain, apply for scholarships, and take advantage of on and off-campus jobs. Several universities abroad now offer hybrid courses that give students the same opportunities at a significantly lower cost.
Recession: The recession may be the best time to enroll in a university and upskill yourself. But it is certainly not the best time to graduate, especially if you are studying abroad with an education loan. The compromised job opportunities create a debt spiral with accumulating interest. The solution is to repay small portions of your education loan through part-time work and supplementary income during your study period.
Rupee tumbling: There are two scenarios where the falling rupee will impact the student borrowers. First, when they are applying for the loan and the rupee depreciates, students who took a loan from Indian lenders will have to arrange for additional funds in the form of a top-up or gap loan as the loan quantum will become smaller. In this case, a loan from an international lender in USD will not impact the amount. However, in the second scenario wherein the student has to repay the loan, a loan from an Indian lender will be beneficial as the rupee depreciation will have no impact, and the student will repay the loan as just another loan. In the case of repayment of a student loan from an international lender, the EMI will significantly increase when the currency depreciates. Currency depreciation should be accounted for in both the scenarios when taking a loan and what suits the student more.
Interest rate hike: Taking an education loan from any lender runs the risk of a sudden increase in the interest rate, which will disrupt your education budget. The RBI hiked the repo rate for the second time in a row to tackle inflation this year. A hike of even 50 bps in repo rate has a huge impact on the interest rate of an education loan. For instance, the monthly EMI for a 10-year INR 30 lakh loan will increase by INR 2.5 to 3 lakhs of the loan amount. In such a case, students are advised to pay higher EMIs rather than requesting an extended loan tenure.
Students should account for these uncontrollable circumstances while taking an education loan to not overburden themselves with debt. Planning and creating a contingency plan before applying for an education loan will help in the long run.
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Views expressed above are the author’s own.
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