An education loan is like buying a twin edged sword. While it paves way for higher studies by taking care of tuition and living expenses, it could also be a source of financial hardships.
In this blog, we bring you Student Cover’s Balance Transfer Scheme through which students and their parents can avoid paying high EMI (Equated Monthly Installments) on education loan.
EDUCATION LOAN – AN UNAVOIDABLE RISK
Parents usually sponsor education loans to finance their child’s higher education abroad. The high cost of education in countries like the US makes it impossible for them to arrange tuition fees and living expenses by any other means. They hope that their children would repay the education loan once they start earning. This often leads them to take education loan without paying heed to the prevailing rate of interest (RoI), especially if the loan is an unsecured one (without collateral).
However, going gets tough when EMIs start eating up a significant chunk of their monthly income. The EMIs could be overwhelming if the Principle (loan amount) or RoI is very high. Any delay or failure to pay EMIs on time could lead to heavy penalties. In case of secured loans taken against collateral such as land or property, the risks multiply exponentially.
STUDENT LOAN SCENARIO – A REALITY CHECK
The data released by Indian Banks Association reveals that as of March 2018, Rs. 6,434.62 Cr. (8.97%) out of 71,724.65 Cr outstanding education loan in India turned into NPAs (Non-Performing Assets). This means that a significant number of students were unable to repay the loans taken for higher studies.
WHAT FACTORS DETERMINE EMIs?
The EMIs depend on three factors, the loan amount, the payment duration and the rate of interest. The higher the loan amount, higher would be the EMI. Similarly, the longer the payment duration, the more equally spread will be the repayments, hence lower EMI. The EMIs also depend on the rate of interest. They increase with rate of interest i.e. higher the rate of interest, higher the EMI and vice versa.
Since the loan amount (tuition fee and living expenses) and duration (10 years normally) are more or less fixed, the EMI fluctuations primarily depend on the rate of interest. The rate at which banks lend to borrowers depends on the lending rate (also known as repo rate) at which the Reserve Bank of India lends money to financial institutions.
WHY EMIs ON HIGH RoI UNBEARABLE?
When banks provide education loan to students, they usually give a moratorium which is the course duration plus six months. It means that students do not have to repay the loan immediately. However, when the repayment period starts, the EMIs are spread across the entire repayment period which is generally 10 years. However, the interest on such loans is charged from day the money was disbursed by the bank.
To illustrate it in simple terms, let us assume that Student Ram gets an education loan of Rs 40 Lakhs at RoI 13% to finance his study in the US. The bank will start charging interest the moment the loan amount is discharged from the bank to the student’s account. So, at the end of the course and six months succeeding that, Ram would already have an accumulated interest of over Rs 13,00,000 (Thirteen Lakhs). This interest gets added to the principal.
Hence, at the end of two-and-the-half years, he would be paying EMI on Rs. 40 Lakhs + Rs. 13 Lakhs = Rs 53 Lakhs at 13% interest rate. For a 10 year loan, the EMIs come out to be Rs. Rs 79,134 per month for next 10 years.
BENEFITS OF STUDENT COVER’s BALANCE TRANSFER
Student Cover’s balance transfer scheme allows those who have already taken student loan at high RoI to shift to ones with lower RoI. Let us explain this with an example.
Suppose student Ram already took a loan of Rs. 40 Lakhs at 13% RoI to study in a University in the US. After completion of the course, he finds a job back in India with a monthly salary of Rs 1,20,000 per month. He will now have to spend Rs 79,134 (i.e. 65%) of his monthly salary to repay the education loan for next 10 years, thereby leaving only Rs 40,866 to meet his other expenses. Moreover, the interest rates on education loans are floating rates. i.e. they increase or decrease based on RBI’s lending rate. So, future EMIs may be more than already high EMI of Rs. 79,134 per month.
If Ram opts for balance transfer through Student Cover and gets a loan of Rs 53 Lakhs at, say 11% RoI, he will enjoy the following benefits.
- His new loan will help him repay the previous education loan of Rs 40 Lakhs which after accumulation of interest in two-and-a-half years became Rs. 53 Lakhs.
- He will get a new loan by simply paying a one-time processing fee of Rs. 10,000.
- For his new loan, the RoI is 11% which makes the EMIs Rs. 73,008 per month for next 10 years.
- Ram will save Rs. 6,126 per month or Rs. 7,35,120 in 10 years.
A student can also opt for balance transfer in the middle of the existing loan repayment schedule. If a student has been paying an EMI for last two years, he or she can seek balance transfer from Student Cover to repay the remaining portion of the loan.
Those interested in knowing more about Student Cover’s balance transfer scheme may contact us at email@example.com or call us at +91 9871377966.
Disclaimer: The data on balance transfer including the rate of interest as shown in the illustration is indicative.