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A stark reality for many youngsters is graduating with huge education loans on their shoulders and not finding suitable jobs. Sometimes, the jobs they find are low-paying, rendering it difficult to service their loans.
According to credit counsellors, the number of youngsters struggling with student loans is on the rise. Parents who have stood as co-obligators are being compelled to repay loans taken by their children. Says Satish Mehta, co-founder, Credexpert: "The job market is tight and students are struggling to make education loan repayments. People are not being placed even after six months or a year. Relative to other loans, education loans are the biggest problem these days for many households."
Higher cost, higher loans
Experts reckon one reason why students are facing hard times in repaying is because the cost of education has risen exponentially. Students have borrowed huge sums and market watchers say students have taken more than Rs 20 lakh towards capitation fees, borrowing against their parents' assets.
The parents of Deepali Sahane, struggling with her meagre income and unable to make repayments to her bank, had to break their bank fixed deposits of Rs 5 lakh. The 26-year-old hasn't found a proper job even after a year from college and is now doing odd jobs to make ends meet. Her parents helped pre-pay a part of the loan and reduce the monthly instalments to make these more manageable. Her dues are down from Rs 10 lakh to currently Rs 5 lakh.
Interest cost adds up
The problem gets compounded because of a moratorium on interest payments until they find a suitable job.
This means interest keeps accruing and is added to repayment of the principal. The longer one cannot pay, the more difficult it becomes to service such a loan in later years, as interest compounds and the principal due increases significantly.
For example, on an education loan of Rs 20 lakh, the first year's interest payment of Rs 2.4 lakh (at 12 per cent) is added back to the principal. Next year, a further interest of 12 per cent on Rs 22.4 lakh accrues, which results in higher interest accrual the next year of Rs 2.7 lakh. This swiftly balloons the total repayment to Rs 25 lakh within two years.
If one doesn't pay interest for two years more, the sum can easily spiral out of hand to unmanageable amounts.
Engineering courses have longer moratoriums on interest payments, of up to four years. Says Mehta: "The upside of interest payment moratoria for the first few years is no cash outflow. The downside is that the outstanding goes up exponentially."
Relief for students
Finance minister P Chidambaram recently announced a waiver of interest payments on education loans taken before April 1, 2009. Chidambaram's move would benefit 900,000 student borrowers by Rs 2,600 crore in 2013-14.
While this is welcome relief for a few, for the many who are still struggling with loans taken after April 1, 2009, and facing payment problems, credit counsellors say it is better to talk to the lender, explaining the situation and expressing your desire to ease some of the repayment terms.
Experts say bankers can extend a repayment period for a few years, or allow you to skip payments for a further year or so.
Experts say bankers will accommodate your case if you are serious about repayments and are making some adjustments. On their part, borrowers should take care that they don't skip payments altogether. At the minimum, pay at least the interest on the loan, with assistance from parents.
If the interest is not paid regularly, it could make repayment unmanageable due to interest accrual. Says Madan Mohan, chief counsellor at Credit Vidya: "Banks may consider re-structuring the loan on a case-by-case basis, depending on the situation of a household. Largely, parents are brought in to settle, as they are the co-obligants or have to put up collateral for education loans."
Go easy on loan
Individuals should make instalments easier to manage. Interest can become a burden if you don't repay on time.
Whenever one gets some lump sum - for example, a bonus - one can use it to make a prepayment of the principal. If you have trouble making immediate payments, parents can step in to ease the burden.
Experts advise that individuals in such situations make big-bullet payments to reduce immediate stress and re-negotiate to lower monthly instalments. A lump sum payment can reduce the outstanding principal, as Deepali Sahane worked it out with her bankers. This would ease the burden while seeking even lower-paying jobs. Over time, as one's salary rises, one can increase the repayments. Experts say individuals should not default on loans, as this would impact credit scores for the future and even jeopardise those of their parents. Says Mehta: "It will impact credit availability at a later stage, especially considering students are just starting out and they would need to borrow more for a house or a car. So, it's better to clear an education loan."
