How much should you borrow in student loans?
Student loans (commonly known as education loans in India) are a financial tool to help students pursue higher education.
The biggest question to ask before availing of any loan is how much should you borrow in student loans. This is because taking on a loan is a huge responsibility; you need to pay the monthly installments on time and make sure that your debt remains a manageable amount that you can easily pay off.
What is the ideal amount you should borrow in education loans?
Ideally, the loan amount should be 25% of the total loan amount you require for your education needs.
For instance, if you want to study in Canada at the top universities then you may require a corpus of Rs. 50 to 60 lakhs to fund your overall education.
As a student, managing this kind of expense is tough and you may be tempted to borrow the entire amount so that you can later pay back the loan once you have a high-paying job.
However, most education loans last 10 to 15 years and shelling out EMIs every month can be tough. So here are some questions you must ask yourself before taking on a loan and deciding how much you should be borrowing in student loans:
- What is the ROI of the program?
- Does the university offer any placement assistance?
- Will you be able to manage the interest hikes?
- How much should you borrow vs self-finance?
What is the ROI of the program?
Taking on a loan is a big responsibility. It means you must understand the return on investment (ROI) of your degree.
It means you have to ask yourself some hard questions like is your selected course good enough to get you a job in the next 6 months? Will your starting salary cover your EMI comfortably?
Are your loan and the interest charged on it a justifiable investment for your degree? These are some important questions you must be able to answer before deciding on a student loan and how much you should borrow in education loans.
Additional read: Education loan process for the UK
Does the university offer any placement assistance?
Once you take on an education loan, you have to ensure that your degree can help you land the job of your dreams. The salary should be enough to take care of all your needs, including the EMIs that will start once your moratorium period for the education loan ends.
Find out if the university you are considering offers placement assistance. What is the past record, where are your alumni members, and what was the average salary base for your previous batch?
These are some questions you need to answer and find before you take on the burden of a loan.
Will you be able to manage the interest hikes?
Inflation is a part of every economy and government attempts to keep it in check affect the interest rates charged by banks. There will be situations where interest rates are hiked up and your EMI increases.
Make sure you are prepared to take on the added responsibility and that you are comfortable in paying the debt off in time and consistently.
How much should you borrow vs self-finance?
Ideally, paying off your education with scholarships, savings and investments your parents have made for your education should be the plan.
But in case you do not have enough savings it is good to take an education loan to cover your education expenses. Try to borrow 25% of the total amount.
If you want to borrow more then make sure you are doing your research on the course, university and the ROI to help you later pay off the debt easily.
You can also apply for scholarships, look for part-time jobs and create passive incomes to self-finance a portion of your degree even if you take a loan.
Education loans are a great means to finance your degree but just like any other loan, you have to pay it back on time and without any delays.
Having all the information can help in the long run. It can also help you decide how much you should borrow in student loans, the type of loans you need to take, whether you should opt for a moratorium or not, and much more.
Always remember, that the bigger the loan, the bigger the time horizon for paying it back. So, try to follow all the steps before making this life-changing decision.