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Rediff.com  » Business » How to prepare your child for an education loan

How to prepare your child for an education loan

September 08, 2016 17:40 IST

Make your child understand that non-repayment of the loan puts all of it at risk

You have taken an education loan to further your child’s dream of higher education. You consider this as an investment in your child’s future. However, sometimes things don’t go quite as planned.

Your child might take longer to complete the course than anticipated. He or she might not be able to get a good job even a year after completing the course. Such issues could make the loan a burden on both you and your child.

To avoid such issues, it is imperative that you make your child understand the responsibilities that come with an education loan.

Responsibility to pay back

You have taken the loan because you didn’t have sufficient money with you, to pay for your child’s education. Explain to your child that this is a debt which is to be repaid fully or at least partly by him or her, out of the income earned in the future.

If you have pledged your house or any other asset as collateral for the loan, make your child understand that non-repayment of the loan puts all of it at risk.

Managing expenses to save

If you are borrowing a student loan of more than Rs 400,000, banks will expect you to put in a margin from your pocket which is usually 15 per cent for studies abroad and 5 per cent for studies in India.

Save up to pay the margin amount by reducing on expenses and encourage your child to do this as well. Teach your child financial planning and the importance of being frugal right from the very beginning of the course. It will help him or her to save up to repay the loan.

Effects of uncertainties

Make your child understand the importance of staying focused on studies and encourage him or her to put in all the efforts needed for the course.

Failures or delays in completing the course can have many fallouts. Delays will mean additional costs for extended stay abroad, additional fees for the course, etc. It could also mean a longer moratorium if the bank agrees to extend it, where simple interest keeps adding up.

If your child does not do well academically, it may affect his employability. Your child may not get a well-paying job, which will affect his repayment capacity. You have to make him understand all these aspects.

Importance of timely payments

Education loans have a high rate of default, especially loans under Rs 400,000, where no collateral or margin is needed.

Teach your child the value of time so that he or she repays the loan as quickly as possible. Defaults can prove costly in the long term for you and your child. The default will get reflected in both your and your child’s credit histories, and future loans will become expensive.

You may also face legal action. Make sure that your child understands these facts. Tell your child that paying off the education loan should be a priority once he or she gets a job and that home and auto loans can wait till the education loan is paid off.

An education loan is a facility provided by banks to fulfil academic goals. Turning the loan into a bad debt may affect the possibility of having a bright future after completion of the desired education.

Illustration: Uttam Ghosh/Rediff.com

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