Education loan – considerations and decisions

As the regular readers of my blog will know by now, my daughter Sharodiya ( Rinki ) has got admission offers from both XLRI and IIM Kozhikode for their MBA program. She may also get into IIM Lucknow when they come up with their latter lists in the next 2 weeks or so. However, as of now, we have got her admitted to XLRI for their BM program.

Rinki was home for the weekend from Bangalore, where she is doing an internship, to get all the papers etc in order and in between the catching up and celebrations we had some serious discussions too about funding the course. Based on what I have always advised my children, they are quite comfortable about taking an Education loan for funding their PG education. So, her first reaction was that we will take a loan from SBI or some equivalent bank, I could pay the interest till she graduates and she will start paying the EMI after she gets a job. While that was my earlier idea as well, this time I took a closer look at all the data and the different options of funding the course.

The relevant facts for consideration are as follows:-

  • The course fees for XLRI are at 21.04 lacs for the duration of 2 years.
  • These will need to be paid in 6 installments. The first one was for 5.42 lacs which I have paid out of my resources. The remaining amount is therefore 15.62 lacs.
  • Rinki is very keen to pay off the loan quickly. At current rate of interest at 9.55% the EMI for the entire amount loan will be nearly 33,000 per month, if the payment period is 5 years.
  • The above should be a breeze as the median salaries at XLRI are around 20 lacs and I certainly expect her to be there if not at a significantly better position.
  • SBI does have an option of paying back the first installment amount but as of now we are not considering that.
  • Assuming an EMI of 33,000, total interest paid by her will be nearly 4.38 lacs.
  • There is pre-payment penalty of 2% applicable in the current rules, after MCLR based lending norms have been in place.
  • The interest for the pre-EMI period will be around 1.4 lacs.

One of the issues I could see with the loan is that, while it is definitely convenient, it does not come cheap in any way. Even with paying it off in 5 years, the overall interest comes to nearly 6 lacs. If we do not pay the interest in the pre-EMI period this goes more obviously. Of course, this is a boon for people who are not able to fund the education otherwise.

For me the question boils down to this essentially – if I take the loan for all installments and start paying the interest today, am I likely to earn more than 9.55% on my money? In the present circumstances of the markets this will be a little optimistic at least in the next year or so. Also, will it be easier to pay a couple of installments more, reduce the loan to about 11 lacs and ask my daughter to pay me back if and when I need the money in future?

There are no easy answers to this but the decision I have currently reached is this:-

  • Take a loan provision of about 17 lacs from SBI.
  • Try and pay the next 2 installments, due in August and November this year, out of my own resources. These will amount to 5.02 lacs.
  • For the remaining 11.6 lacs the EMI will be 24,391 for a 5 year paying period and interest paid will be 3,03,460.
  • Interest to be paid before the EMI starts is 81000.
  • In other words by paying the 5 lacs now, I am reducing the total interest outgo by about 2 lacs overall.

I have always held that no loan is really a good loan, while some of them are necessary. Education loans availability is a great thing for many people who would not be able to afford the expensive quality education otherwise. However, it does come at a price and the students need to build themselves up to ensure that they are able to pay it back without getting into any real problems.

For colleges like the top 6 IIM’s , XLRI, FMS  and a few others in the second tier this is not really an issue as most students will get pretty decent jobs and should be able to pay off the loan in 5 years. Caution is to be exhibited in good measure for other colleges.

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7 thoughts on “Education loan – considerations and decisions

  1. Good to know your daughter is thru for XL, and all the best for IIML.

    My two cents:
    1. I would recommend not to interfere by extending credit to daughter yourself, and asking her to pay you if and when reqd. It is not the same. Best to let her borrow from the bank, even if economically a worse option (one of the many decisions where economics are probably not the only consideration)
    2. Your assumption on median salary (INR 20 lac) from XL needs to be more conservative. I would go with half of the number you have mentioned. There are many ways the median salary quoted is also skewed (of course the mean / average is skewed in a worse manner)

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    • Thank you for your comment. I think my daughter is quite grounded and fine with paying for the entire loan on her own. However I am the one who is looking into this a little more deeply in order to decide what is best in the overall financial angle.
      As far as salaries go, the median salary at the top IIM and XLRI is actually in the range of 18-20 lacs. This is something I do know about as I am involved for a long time in the IT industry and do have a network of friends in the other industries.

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  2. Raj Sir,
    Congratulations to Rinki for XLRI admission and wishing best both Rinki and Ranajoy for their studies. As I am following you and your post from quite sometime, one point is beyond my understanding. I would appreciate if you help me understand the same. Let me explain below in steps:
    1. When one invest with Goals in mind, one important Goal is Children’s education expenses (mainly Higher education expenses).
    2. We all invest as per Goals so that during that time, we don’t go for any kind of Loans and invested Corpus can work for the Goal.
    3. From Equity portfolio and Debt portfolio, if one can source the goal (ex. 20L); is it still advisable to take loan and pay interest. Here, I am talking for people who has sources for funding. If Yes, how. I agree for people who cannot source funds, the Education Loan is a boon for them.
    4. In any case, it will be more cash outflow if one takes loan even though the interest is only around 9%.
    5. Is it not a good idea to give a loan to Kid itself and ask him/her to pay off the Principal amount after getting Job on a monthly basis. I think Personal finance is all about mitigating future Risk (Cashflow outgo) with proper planning (through investments). Thank you.

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    • If you read my posts on this you will understand my philosophy of making my children responsible for their PG education expenses. So this has never been a goal for me as my daughter understands that she is responsible for it. I have spent without any hesitation for their schooling, coaching for competitive exams, Engineering education etc. The whole idea was to ensure that they are capable of being independent by the time they graduate.

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  3. Your estimate of 9.55% interest on edn loan is wrong. I have just taken a loan of 30 lakhs for my edn in Australia. After researching I found Allahbad Bank the cheapest @ 10.80% that also only if interest is serviced prior to the start of EMI, when the EMI starts the interest rate is 11.80%.

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    • The figure is right for the XLRI or IIM loan I am talking about. This is the SBI Scholar loan, applicable to certain top institutes. I do not think this is available for Education abroad.

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  4. 9.55% interest rates are currently been quoted by sbi , union bank and bank of india via mail to me also [ after admit from iim].

    so the figures are right.

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