He was hoping to get into a high-paying job after finishing the course. Now, the course completion will get delayed, and even finding a job will be challenging. The salary from his current job barely takes care of the household expenses and equated monthly instalments (EMIs), which is low as he has to pay only the interest portion during the course.
Now, the EMI will increase even before the course completion and bearing the high cost of living in Mumbai will become unsustainable for him. “I will look for a job in Kolkata itself to be able to repay my education loan," said Ganguly.
For students and recent graduates, repayment of education loans has become a problem because new hiring has almost come to a standstill.
Adding to the distress, the US Immigration and Customs Enforcement’ agency said last week that students whose colleges have shifted online will not be allowed to stay in the US. So Indians studying in the US will have to shift to colleges conducting in-person classes or will have to return to India which will lower their chances of getting a high-paying job after finishing the course.
Then there are others like Skanda Venkatesh Ashok, 24, who need to do mandatory internship in the middle of their courses to be eligible for the remaining course but are not getting anything due to paucity of jobs. Ashok took an education loan in August 2019 for a two-year masters program in construction project management at a Scotland-based university. “As I was unable to find an internship due to the pandemic, I will have to complete my course within a year," said Ashok, who returned to Bengaluru because he couldn’t find an internship in Scotland. He is still trying to find one.
According to data from CRIF High Mark, a credit information company, as of March, there were 24,89,737 active education loans by Indian lenders and the outstanding was ₹92,711 crore. Delinquency of active loans overdue by 90 days was up 13.34% in March 2020 from 12.76% in December.
Here are some ways to navigate through the crisis.
Moratorium: Education loans have different structures. Lenders provide a moratorium during the course period. In some cases, students don’t need to pay any money until six months after the completion of the course. Some lenders charge simple interest during the course period and some may require the student to start paying the normal loan interest, which is higher, immediately.
Due to the pandemic, the Reserve Bank of India (RBI) has also announced a moratorium for all term loans, including education loans. Students who are nearing course completion or have finished the course, can opt for the moratorium RBI has announced where they won’t need to pay even the interest charges.
This, however, comes at a cost. The interest that the borrower forgoes paying during the moratorium period is added to the principal. As the principal amount increases, so does the EMI and interest outgo. “The longer you wait to begin the repayments, the higher interest you would be paying," said Adhil Shetty, CEO, Bankbazaar.
Restructuring: Another option is to contact the lender and check if any restructuring of the loan is possible. “Consider extending the loan tenure or opt for step-up repayment structure which lowers the EMIs in the initial tenure," said Raj Khosla, founder and managing director, MyMoneyMantra.com.
Refinancing: This may not be easy in the current circumstances. Go for this only if you are getting a lower interest rate than what you are paying at present. The lower EMIs may give you some relief.
If you have a loan of over 10 years, even a 25-30 basis points (bps) difference can result in savings. But if your tenure is below 10 years, the interest rate difference between the old and new lenders should be 50 bps or more. One bps is one-hundredth of a percentage point. “Otherwise, the cost of the switch, including 1% file charges, 1% processing charges and maybe even a 0.5% prepayment penalty, will eat into the gains from the lower rate of the new lender," said Khosla.
If nothing works for you, approach family members for help. Most lenders ask for a guarantor while disbursing the loan. They usually prefer one of the working parents. They could initiate recovery proceedings against the guarantor in case the borrower defaults.
According to Khosla, if a close family member has an ongoing home loan, it could be a good idea to take a top-up on it and use it to repay the education loan. Asking close family members to help is better than going for a personal loan to service the education loan.
“Though not always advisable, you could ask for financial support from your family and friends until you’re able to find a job," said Deepali Sen, founder partner, Srujan Financial Advisers LLP.
In the worst-case scenario, the family could consider liquidating investments or assets. If you are unable to repay the EMIs due to layoff, leveraging your skills until you get a new job is important. “Upgrade your knowledge and skill set to increase the chances of employability. Be vigilant and look at companies that are neutrally impacted by the pandemic," said Tanwir Alam, founder and CEO, Fincart, a financial planning firm.
Debt problems have become common amid the covid-19 crisis but you need to ensure regular repayment. In most cases, an education loan is the first credit facility that an individual avails of, and therefore, it plays a crucial role in building one’s creditworthiness. “Take all possible steps to maintain an unblemished record and protect the credit score," said Khosla. Defaulting could also result in forfeiting the collateral.
According to Shetty, it is expected that banks will look at education loans sympathetically. So consider all the options available that can help you deal with the education loan.
Tinesh Bhasin contributed to the story