How can you reduce the burden of education loan amid coronavirus pandemic?

The coronavirus pandemic has hit just about everyone in some way or the other. People have suffered pay cuts, many have been furloughed and countless more left unemployed. This has happened because the bottom lines of many companies have taken a beating since March of this year. Due to this household incomes have been thrown in disarray which has especially effected those repaying loans.

All kinds of borrowers are in trouble now. For students and recent graduates, repayment of education loans has become a problem because hiring has almost come to a standstill.
If you are finding it difficult to manage the repayment of your education loan, here is what you should do.

What can existing education loan borrowers do?
If you are someone who is already servicing an education loan and are now finding it difficult to repay it, the first thing you should do is to contact your lender and ask them if your loan can be restructured.

In August 2020, the Reserve Bank of India (RBI) had allowed restructuring of loans without classifying them as NPAs to help companies and individuals manage the financial stress caused by the Covid 19 pandemic. And then in May 2021, due to the second wave of Covid-19, it announced a second resolution framework for many borrowers including individual borrowers.

As per the recent guidelines issued by RBI in May 2021, the resolution plan for personal loans (which includes education loans as per the apex bank's classification) may include conversion of any interest accrued/to be accrued into credit facility, rescheduling of payments and granting of the moratorium for maximum 2 years (including first restructuring) based on borrower's income stream assessment. The RBI has allowed lenders to modify the overall tenor of loan restructured accordingly. To be eligible for this restructuring the borrower should have made regular repayment till March 31, 2021. The last date for applying for the second loan restructuring is September 30, 2021.

Gaurav Aggarwal, Director, Unsecured Loans, Paisabazaar.com said, "The decision to choose from the loan restructuring options should be based on borrowers' repayment capacity and the additional interest cost incurred due to restructuring. Those expecting their cash flows to get restored within a few months should opt for the rescheduling of payments while those expecting income disruption to continue for a longer period should opt for the loan moratorium if offered."

What can new education loan borrowers do?
1. Go for a collateral Loan
Most banks allow students to take education loans without collateral. However, you must know that opting for a secured loan with collateral can be a cheaper option.

Pranjal Kamra, CEO, Finology, a Raipur-based Fintech firm, said, "Many banks or financial institutions do not ask for collateral unless your education loan amount is very high. An education loan with collateral offers lower interest rate compared to the unsecured loans as the lender is not exposed to a high risk of default by the borrower. So, if you own any assets like land, property or FD, you can use it as collateral to apply for an education loan."

2. Pay interest during moratorium
Equated monthly instalments (EMIs) of education loan do not start immediately after the loan is disbursed. The borrower can start the loan repayment after the completion of the course or when he/she starts earning. This grace period is called a moratorium. Though the borrower is not required to pay the EMIs during the moratorium period, the lender charges interest (simple interest) which is added to the principal amount.

Kamra said, "Some banks may offer concessions (usually 1 per cent) on the overall interest rate if the borrower chooses to pay the interest amount during the moratorium period. Thus, it is advisable to pay the interest portion of the loan during the moratorium period to reduce the cost of repayment."

3. Loan subsidy schemes
The central government and various state governments as well offer subsidy schemes to make educational loans more affordable.

Adhil Shetty, CEO, BankBazaar.com said, "For instance, the Ministry of Education offers subsidies to students belonging to the Economically Weaker Section (EWS) category. The eligibility criteria requires that the student's family's gross annual income not exceed Rs 4.5 lakh. The interest accrued on the loan during the course plus one-year moratorium will be paid by the Government of India."

4. Form a sensible repayment strategy
Normally, unsecured education loans are available for a period of up to eight years. On the other hand, secured education loans are available for a tenure of up to 10 years and more.

"Secured education loans are available for longer tenure - up to 10 years for loans up to Rs 7.5 lakh, and 15 years for a loan amount above Rs 7.5 lakh. Though longer tenure reduces the monthly EMI amount, it increases the overall repayment cost. Thus, it is always suggested to go for a shorter tenure. Also, prepayment of education loan does not carry any penalty, so you can repay the outstanding loan amount to save on interest cost," said Kamra.

5. Lenders may offer concessional rates for women, those studying in premier institutions
Shetty said, "Many lenders offer concessional rates to women. They also reserve their lowest rates for students going to premier institutions such as IITs and IIMs, or universities of national importance. The eligibility varies from one lender to another."

Point to note
If you apply for an education loan, then you are eligible for tax deduction under Section 80(E) of the Income-tax Act, 1961. The deduction can be claimed on the interest paid towards the education loan. However, you must know that the tax benefit can only be claimed by an individual who has taken the loan even if he/she is not the actual beneficiary.