Education is often considered to be a stepping stone to leading a better and more fulfilling life. However with fast rising cost of higher education it may sometimes be beyond the means of all students to have access to it. This is where education loans step in; these loans are often provided at easy terms to ensure that no deserving student misses out on an opportunity to receive higher education due to lack of funds. However education loans need to be repaid on time as per the agreed terms and conditions else they can become a nightmare for both the lender as well as the borrowers.
As per government directives public sector banks are required to sanction education loans without seeking any collateral for them. This makes the education loans riskier for the lender as compared to other loans like auto or home loans. On an average public sector banks face 8% default on the education loans that they extend, SBI faces a default of 5% on education loans as compared to less than a 1% default on home loans. Almost all banks face more defaults on education loans as compared to other loans that they extend.
While banks may be willing to extend educational loans on concessional terms as they fall under the priority sector, they do want the debt repaid to them in timely and disciplined fashion. There are multiple reasons for the high incidence of defaults on education loan.
The reason for default can be willful as well as it could be a host of genuine reasons beyond the student’s control. Students may willfully default and have no intention of repaying these loans. In the absence of any collateral the bank has nothing to fall back on. After finishing the course the students may leave the city or even country thereby making it difficult for the lender to track them.
Sometimes there may be genuine reasons too for defaults on loans. The students may borrow more than they can afford to repay. This may be due to factors like non-realistic expectations about salary, poor quality of education provided by institutes which impacts the employability of the students or bad market conditions which make it difficult to get a job. Whatever be the cause the lenders do find themselves in a tricky situation when it comes to student loans.
Borrowers need to keep in mind that they need to repay their loans in a timely fashion. This assumes a greater importance when it comes to education loans. Since these loans are often extended at concessional terms and are considered an investment in the country’s future it is moral obligation of the borrower to repay them back.
Also since they are more often than not the first debt that an individual acquires they set the tone for the credit history for future. A student might assume that if they change addresses then it may be difficult to track them; even if the lender is unable to track you the default will definitely be reported in your credit report and will continue to reflect there. Any default will lower your credit rating and will reduce your chances of getting credit in the future and believe it or not may also compromise your shot at finding employment.
Even if one repays the due amount at a later stage, missed payments and defaults continue to feature in the credit reports for a long time thereby raising red flags. So for someone looking to start a business get a job, or buy a new car defaulting on a loan could be a serious impediment in furthering your dream.
Students should ensure that they borrow only reasonable amounts that they can repay easily and should not wait for the right job to start repayment. It also pays to research well before getting admission to any course so that you are not left with an expensive education that serves no purpose.
Students and lenders can make the best of student loans if they are treated in the right form else they could turn into a nightmare for both the borrower and the lender.
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