Does education inflation impact student loan interest rates?
Education inflation impacts student loan interest rates, however, this impact is not direct or uniform. In inflationary times, the chances of high-interest rates are feasible because the need to cut demand in the market is high.
1. Education inflation rises faster than the standard economic inflation
This means that if the standard inflation in the country of your choice is at say, 5% – 6%, in the education segment it can easily go up to 8-9%.
This is observed extensively in the education costs in Western countries. The reason: excessive growing demand v/s fixed supply.
With this trend here to stay at least for the next decade, you would do well to consider its impact on the education loan that you are planning for your child.
2. Understanding the variables in student loans
There are two factors to be considered for student loans: a. whom are you taking the loan from; b. What kind of a loan are you taking?
Whom are you taking the loan from You can take an education loan from government organizations or nationalized banks in India, or you get one from private organizations: private banks or private funding/finance companies.
With interest rates in the first category being lower, these loans are usually more difficult to obtain, as there are several eligibility criteria, including a pre-selected list of institutions for which they will issue the loans.
These are the top-rung institutes of any country and not every international student will qualify for the same. Also, they have extensive paperwork. So the application and approval processes in these lenders are comparatively slower.
On the other hand, the private players have a larger pool of institutions for whom they will grant loans, and often their eligibility criteria are less stringent.
But their interest rates are higher and over the long tenure of the education loans, even small differences in the interest rates can compound and snowball into large amounts.
What kind of interest rate are you opting for: you can choose between fixed interest rates and variable interest rates.
It is important to note that in India, fixed rates rise slower than variable rates; but they definitely rise. So do not be misled by the term ‘fixed’.
3. How does all of this impact your child’s education loan?
Inflation means less purchasing power: Well, as inflation grows, and interest rates go up, your child’s purchasing power gets limited as salaries do not keep pace with inflation. This puts stress on repayment funds.
- Missing education loan payments affect the individual’s credit score: This is a serious implication and must be explained well to the child. While the temptation to miss the monthly payments is high, the young adult must be disciplined to make the necessary payments on time.
- Refinance the education loan: This is a good way to revise the loan terms, especially as most lenders offer waivers when education loans are transferred. This allows the student to negotiate payment terms that are more suitable to his / her current financial situation. And yes, these loans can be refinanced several times.
- Start a side hustle: If the primary salary is not enough to cover the loan payments and expenses comfortably, the student should consider taking up a side hustle. This will help ease the pressure, and ensure the loan is being regularly paid up.
4. Save during the study years and pay up the loan at the earliest
While this may seem contrary to the idea of taking a loan, this really is the financially smart thing to do.
If you are taking the education loan for your child’s undergrad studies, you will typically have these four years of grace before repayment starts.
As a family, you must plan your savings and investments in such a way that by the time your child graduates, a considerable corpus is ready to pay up.
This may mean foregoing luxuries and living on a budget for your child during the college years, but it is the fastest way to get your child out of debt.
Why do block payments help?
Changing market dynamics and growing inflation push your loan repayment amounts ever higher with increased interest rates, extended tenures, and so on.
Starting your life with so much liability puts a lot of restrictions on your child’s early career. Instead, putting money away, investing in mutual funds or the stock market, and building a solid corpus with expert guidance from EduFund can give your child a confident start in their career.
Choose well, and don’t let the education inflation turn your child’s future into a whirlwind of merely getting out of education loan debt. Plan the finances well, and let your child really fly up to the skies of success.
If you are taking an education loan from a lender in another country, make sure you are aware of the rules and regulations that apply to student loans in that country.
How does education inflation impact student loan interest rates?
Education inflation tends to drive up student loan interest rates, causing a significant impact on repayment.
What are the variables to consider for student loans?
Two key factors are the lender (government or private) and the type of interest rate (fixed or variable).
How does education inflation affect a student’s purchasing power?
As inflation rises and interest rates increase, a student’s purchasing power diminishes due to slower salary growth.
What options are available for managing education loan payments?
Options include refinancing the loan, starting a side hustle, and saving during the study years to pay off the loan early.
Why is saving during the study years a financially smart choice for education loans?
Saving during the study years can help build a corpus to pay off the loan, ensuring a debt-free start to a child’s career despite rising inflation and interest rates.