Friday, 1 June, 2012

Financial Impact of Education Loans

Financial Impact of Education Loans

It is that time of the year when many of your children, nephews and nieces, friends, kids of friends, etc. will be wondering about a critical decision which could impact their entire life:

  • Which group should I take in +2? Which course/specialisation should I join in Engineering? Which college should I choose? Should I consider my current job offer or should I go in for another couple of years of "higher" education by way of a post-graduation in my field or, for that matter, a nice MBA from a "reputed" institute?

Obviously, the decision-making process is tough enough even without taking into account the financial impact of the decision. However, I wish to draw your attention to the actual financial impact of any decision that you take now and highlight the need to think about this aspect at some length.

A typical engineering/medical degree from a good college costs upwards of 10-15 lakhs these days. Often, the figure is in excess of 20 lakhs. And an investment of nothing less than 4-6 years of your life. If you include the cost of a quality PG degree from a premier domestic institution, the cost will increase further by another 10-15 lakhs. And a couple of years extra. In case of a "foreign" degree from the typical US / UK / European college, the costs will zoom up even further.

When you calculate the cost, you must not only include the actual cost of education, hostel fees, etc., but should also calculate the opportunity cost of the time you'll be investing in such a course, especially when you are calculating the cost of a post-graduate course.

The two obvious choices to fund this education are:

  • Own funds / parents funds
  • Education Loans

In case of the former, you need to calculate the opportunity cost of utilising your own funds vis-a-vis the cost of borrowing.

In case of the latter, you need to be even more aware of the ACTUAL cost of committing yourself to a reasonably long-term educational loan for an amount that is certainly not an insignificant one. Do a realistic calculation of the likely EMI (Equated Monthly Instalments) and the duration for which you'll continue to be repaying.

Use your own simple rules of thumb to assist your decision-making process.

For instance, if, after completing your education, you are able to save 20% of your salary every month, how soon will you be able to clear off your loans? What back-up plans do you have if you lose your job (or god forbid, not get a job)? If you are going to be repaying your educational loan for 3 years after you pass out of college, is that education loan worth taking in the first place? What if the repayment duration is 5 years? What if it is 7 years? 10 years?

I'm not for a moment suggesting that you refrain from either spending your parents money on education or that you should avoid taking an education loan. All I'm suggesting is that you MUST think through the implications before deciding to take that education loan.

Again, as a rule of thumb, if the cost of a good MBA from IIM Ahmedabad is going to be around 20 lakhs and you're going to land up a job that pays 15 lakhs per annum after passing out, perhaps it ought to be worth your while taking a loan. After all, you'll be able to clear off the loan in 3-4 years with ease.

However, if you're going to do a not-so-good MBA from XYZ College, costing around 25 lakhs, and the average placement record of that college suggests that you'll land up with a job that pays you 5 lakhs per annum, would you still take a loan to fund your education?

Think about it!



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