Five common education financing pitfalls you must steer clear of

Education costs have risen by 11-12% annually, far outpacing inflation rates.

Spiralling education inflation has, over the years, prompted many Indian middle-class families to look at education loans as an essential means to fund higher studies.

Education costs have risen by 11-12 percent annually, far outpacing inflation rates and placing significant strain on households across the socio-economic spectrum.

Education financing, while vital, can harbour hidden risks that can lead to significant debt burdens for students and families, if not understood correctly.

Understanding these potential pitfalls is crucial to ensuring that education remains an investment in opportunity rather than a source of financial hardship. Here are the most common issues in education financing:

Incorrect cost estimation

An incorrect, conservative estimate of education and allied costs in order to lower the loan burden could mean a shortfall in funds at critical junctures.

This could jeopardise a student's ability to meet the basic needs, such as food, transportation, and housing, profoundly impacting their academic performance and overall well-being. On the contrary, over-borrowing for education loans can burden students with excessive EMIs. If one is not prepared, this can lead to financial strain and increased stress, hindering one's long-term financial stability and well-being.

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Mismatch in loan sanction turnaround time

It is important to understand the time taken from the start of the loan application to disbursement. Further, international transactions for college fees can take several days to process. Instances of admission offer withdrawal due to last-minute fee transfers not reaching the college's account on time have been reported.

Repayment schedule

Given the cost advantages, opting for a shorter repayment schedule may seem appealing. However, unexpected expenses in your first year of employment can lead to missed payments and their repercussions, such as late fees, and damage your credit score. This can hinder your financial stability and future borrowing opportunities, emphasising the importance of choosing a repayment plan wisely.

Also read | Using SIPs to repay education loans more efficiently

Not planning early

While education loans are an important source of financing, the debt taken can be reduced to an extent with early investment planning. For example, if parents were to invest Rs 10,000 a month when their child was born, they would have a corpus of over Rs 76 lakh when the child turns 18, at an assumed 12 percent return. Early financial planning can thus offer a valuable means of reducing reliance on loans for educational expenses.

Also read | Studying abroad: How to plan financially for your child’s foreign education

Not investing while repaying loan

An effective strategy to better manage your education loan will be to start investing an amount equivalent to a certain percent of your EMI. For example, let us say you take a Rs 20 lakh loan to do your master's abroad.

Assuming that the loan taken is for 10 years, at 10 percent interest rate, your EMI would be Rs 26,430. At the time of repayment, if you start investing an amount equal to 25 percent of your EMI, that is Rs 6,608, you will be able to pay off the loan just before the seventh year begins. By doing so, you would have effectively saved Rs 9.77 lakh in EMI payments.

In conclusion, education financing is pivotal in ensuring equitable access to higher education for students from all walks of life. However, it demands careful navigation to sidestep potential financial pitfalls. By carefully estimating costs, understanding loan terms and early investment planning, students and families can secure their educational goals with greater fiscal responsibility.