India, with a population of over 140 crore, is both the world’s largest and youngest nation. Over 31.5 crore students are preparing to enter the workforce, which holds great potential for India’s economy. Education, however, is crucial in realizing this potential. Student loans play a vital role in making quality education accessible. Despite their importance, many borrowers don’t fully understand how these loans work. Here, we’ll uncover some lesser-known facts about education loans to help students and families make informed decisions.
1. You Can Start Repaying While Still in School
Many don’t realize that repayment can begin even before graduation. Student loans usually offer a moratorium period, allowing repayment to start after finishing school. But you can choose to pay the interest while still studying. This reduces the debt burden you’ll face later. Early repayment can also help students build financial discipline before entering the workforce.
2. Relief Options Are Available: Consolidation and Refinancing
Students often accumulate multiple loans over the years. Consolidation and refinancing can simplify and reduce the costs of managing this debt.
Consolidation lets you combine different loans into one, often with better terms. This reduces monthly payments but could extend the repayment term, increasing the total interest.
Refinancing replaces a loan with a new one, typically at a lower interest rate. However, refinancing often requires a good credit score, making it more suitable for those already working. Other relief options include income-driven repayment plans, which tie payments to income, and loan forgiveness programs for specific professions.
3. Default Rates Are Rising
Defaults on student loans are a growing concern. About 8% of student loans from Public Sector Banks became Non-Performing Assets by the end of 2022. Defaults can damage credit scores, lead to wage garnishment, and even result in the seizure of tax refunds. Many default due to a lack of financial literacy, underscoring the need for better education on managing loans.
4. Average Loan Balances Are Growing
The average student loan amount rose from ₹21.5 lakh in 2021 to ₹25 lakh in 2022. This increase makes it more difficult for borrowers to achieve other financial goals, like buying a home or saving for retirement. The rising costs highlight the need for informed decisions when choosing education financing.
5. Interest Rates Vary Widely
Interest rates differ based on the type of loan and the borrower’s credit score. Federal loans often have lower rates, as they are government-backed. But private loans may offer flexibility, even if they require a higher credit score. Borrowers should compare loans carefully to find the best fit.
6. Bankruptcy is Possible but Rarely Successful
Some may not know that student loans can sometimes be discharged in bankruptcy. However, it’s tough to qualify. Borrowers must prove that repayment would cause undue hardship, which is difficult and often unsuccessful. As a last resort, bankruptcy can offer relief, but it has long-term effects on credit scores and future borrowing.
7. The Borrower Holds Ultimate Responsibility
Even if parents co-sign the loan, the primary responsibility rests with the student. Both the student and co-signer share liability, but the student usually faces the long-term consequences. Reviewing loan agreements is crucial to understanding the obligations and ensuring a manageable repayment plan.
Conclusion
Student loans open doors to higher education, but they come with significant responsibilities. Understanding repayment options, relief methods, and default consequences can help borrowers make better choices. As India aims for economic growth, financial literacy about student loans will become essential. Prospective borrowers should explore all options, seek advice, and consider the impact on their future financial health.
