Avoid debt trap after taking education loan: What students must be wary of

Millions of students appear for the NEET exam each year with hopes of becoming doctors. Among them is Rishi. But, like many others, Rishi didn’t manage to get a seat in a government medical college when he cracked the exam in 2018.

Coming from a middle-class family, Rishi couldn’t afford the high costs of private medical colleges in India, which range from Rs 30 lakh to Rs 1 crore. So, he turned to Kyrgyzstan, where the total cost came to Rs 25 lakh. To fund this, Rishi took out an education loan. But, despite completing his studies, he found himself without a job six months after graduation. Now, he is in debt and is exploring different ways to pay it off.

 

If you take an education loan and can’t secure a job after completing your studies, it can lead to serious financial stress.

"There is a grace period when you take an education loan, called the moratorium period. It’s usually the duration of the course plus six months to a year after finishing the course. During this time, students don’t have to make EMI payments, giving them time to secure a job," says Adhil Shetty, CEO of Bankbazaar.com.

He adds, "However, interest accrues during this period, and some banks may ask for simple interest payments during this time."

How does an education loan work, and what can parents and students do to avoid falling into the debt trap like Rishi? We explain here:

How does an education loan work for students in India?

Education loans provide financial support for students pursuing higher studies, both domestically and abroad. The loan generally covers tuition, accommodation, books, and related expenses. Applicants, or their parents, approach a bank or financial institution, and the loan is disbursed directly to the educational institution in instalments.

Repayment begins after the moratorium period, which usually extends six months to a year after completing the course. This gives students time to find employment before starting repayments.

What are the common mistakes students make?

"Students often make mistakes during the education loan process because they’re focused on their studies," says Nilanjan Chattoraj, Head – Credit & Product– Education Loans, InCred Finance.

Common mistakes include:

— Choosing lower-quality universities due to cost constraints

— Opting for countries with poor job prospects post-graduation

— Deferring EMI payments, increasing the overall loan amount

— Overextending financially, instead of using personal savings

— Inadequate research, missing loan agreement details, and ignoring foreign exchange rates

What are the biggest risks of taking a student loan?

"Unsecured loans carry the risk of late payments or defaults," says Chattoraj. "Geopolitical issues in the host country can affect students' visas and job opportunities, further impacting their ability to repay loans."

Consequences of loan defaults

Meghna Mishra, Senior Partner at Karanjawala & Co, explains, "Defaulting on a loan can lead to a reduced credit score, making it difficult to get loans or credit cards in the future. It can also lead to legal proceedings, which can cause stress and require additional legal expenses. In some cases, court action may result in the attachment of assets."

How can students avoid falling into a debt trap?

"Applicants should make regular payments and consider accelerated repayments if they receive windfall gains or once they start working," advises Chattoraj. "Delaying EMI payments or diverting income towards luxuries increases the loan principal. Students should budget carefully, seek scholarships, work part-time, and choose loans with favourable terms."

Mishra adds, "If students face financial difficulties, they should immediately communicate with their lender to explore options like income-driven repayment plans or deferment."

Cosigning an education loan

"Co-signing an education loan means both the student and the co-signer are equally responsible for repayments," says Chattoraj. "If the student misses payments, the co-signer’s credit score will also be affected."

Financial habits to adopt early

"Borrow responsibly and only as much as needed," advises Chattoraj. "Look for cheaper off-campus housing and offset costs through part-time jobs, scholarships, or assistantships. Begin EMI payments as soon as possible, and avoid deferring payments."

Is it advisable to take an education loan?

"Yes, taking an education loan helps students study abroad without worrying about the financial burden. It also supports their visa application," says Chattoraj. However, he cautions students to avoid falling into a loan trap. Proper planning and financial discipline are crucial to ensuring a manageable repayment journey.