Higher education requires intensive planning. Not only from the perspective of admission to prestigious universities, but also from the perspective of finance. The cost of education has risen so high that parents have to take out a student loan even for higher education in India. Several unexpected setbacks will no doubt increase the cost of education, which borrowers often fail to take into account. Let’s take a look at the four factors currently troubling student loan borrowers and future borrowers to consider:
Inflation: Inflation has increased the cost of education while the minimum wage has remained the same. Coupled with the declining rupee and the RBI’s response to curb inflation by raising the repo rate, the young borrowers have made it quite difficult. Deteriorating economic conditions mean larger loans, larger EMIs and an unstable labor market. To address this, students should choose an appropriate education loan, consider non-traditional higher education countries that offer quality education that meets their purpose, such as Germany, France or Spain, apply for scholarships, and take advantage of on-campus and off-campus jobs. Several universities abroad now offer hybrid programs that offer students the same opportunities at significantly lower costs.
Recession: The recession may be the best time to enroll in college and educate yourself. But it’s certainly not the best time to graduate, especially if you’re studying abroad with a student loan. The compromised employment opportunities create a debt spiral with rising interest rates. The solution is to repay a small part of your student loan during your study period through part-time work and additional income.
Rupee tumbles: There are two scenarios where the declining rupee will affect student borrowers. Firstly, when they apply for the loan and the rupee drops, students who have taken out a loan from Indian lenders will have to arrange extra money in the form of top-up or intermediate loan as the loan quantity gets smaller. In this case, a loan from an international lender in USD will not affect the amount. However, in the second scenario where the student has to repay the loan, a loan from an Indian lender will be beneficial as the rupee depreciation has no impact and the student repays the loan as just another loan. In the case of a student loan repayment from an international lender, the EMI will rise significantly when the currency depreciates. Currency depreciation should be included in both the scenarios when taking out a loan and what is more appropriate for the student.
Interest rate hike: If you take out a student loan from a lender, you run the risk of interest rates rising suddenly, disrupting your education budget. The RBI raised the repo rate for the second time in a row this year to tackle inflation. An increase of even 50 basis points in the repo rate has a huge impact on the interest rate of an education loan. For example, the monthly EMI for a 10-year INR 30 lakh loan will increase by INR 2.5 to 3 lakhs of the loan amount. In such a case, students are advised to pay higher EMIs rather than apply for an extended loan.
Students should be mindful of these uncontrollable circumstances while taking out a student loan so as not to burden themselves with debt. Planning and creating an emergency plan before applying for a student loan will help in the long run.
The above views are those of the author.
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