NBFCs are becoming the go-to option for education loans as they offer both secured and unsecured education loans which are both flexible and accessible for a broader range of borrowers. But they do not come without some serious risks, read to find out.
Given the rising cost of higher education domestically and internationally, education loans are becoming a go-to financial tool for many Indian families. A recent report by CIRISIL shows that education loans, particularly those funding overseas courses, are one of the fastest-growing segments for non-banking financial companies (NBFCs) because of a rising demand for higher education.
Says, Anand K Rathi, Co-Founder of MIRA Money, “Taking out a loan for education has become common these days. More and more students are opting to study abroad, often influenced by their peers. The cost of education has also risen due to the devaluation of the INR against most currencies. As a result, many people resort to taking out loans from banks, pledging their properties, or NBFCs.”
But as parents contemplate meeting the requirements of funding their children’s education, the key question remains: Should they turn to NBFCs for education loans?
According to the CIRISIL data, NBFCs’ education loan assets under management (AUM) have increased to Rs 43,000 crore as of March 31, 2024. This follows a robust growth of over 80 per cent and 70 per cent they witnessed in the financial year 2023 and 2024, respectively. Moreover, their AUM is expected to grow around 40-45 per cent to surpass Rs 60,000 crore this fiscal year.
Why are NBFCs becoming so popular?
NBFCs and traditional banks differ in education loans in the way they handle repayment. While traditional banks often offer a moratorium wherein payments are deferred until after the course, NBFCs typically operate on a no-moratorium model, where EMI payments begin immediately after disbursement. This can lead to higher long-term costs due to accumulated interest for borrowers.
Says Brajesh Mishra, Co-founder, and COO of Varthana, an NBFC into education loans, “NBFCs are becoming the go-to option for education loans because they extend both secured and unsecured education loans which are both flexible and accessible. Those who are new to banking, have low credit scores, including students with weak academic grades can particularly benefit from such loans."
1. Where traditional banks may prioritise loans for elite colleges, NBFCs may not have any stricter criteria in this regard with a wider coverage of institutions within India and abroad.
2. In contrast to traditional banks, NBFCs are known to offer loans on a variety of short and long-term courses. There can be some career-specific or skill-development courses. NBFCs can be more open to funding non-traditional courses such as coding, design, and digital marketing, which are often neglected by traditional banks. This meets with requirements of the current job market, where non-conventional skills are in high demand.
3. NBFCs can disburse loans faster than traditional banks, which is needed when courses require upfront payments. This helps families from draining their savings while waiting for the loan to be approved.
Despite all the benefits, NBFCs are not without their own set of risks. Know the following before you opt for one:
1. Higher Interest Rates: “Traditional banks often offer loans at much lower interest rates, which NBFCs may not be able to match,” Mishra states. Hence, NBFCs may charge higher interest rates to borrowers with low credit scores, irregular incomes, or those who typically would not qualify for loans from conventional lenders. This could increase the overall cost of borrowing for you.
2. EMI Obligations Regardless of Employment: NBFCs often require borrowers to start paying EMIs immediately after loan disbursement. “This could put pressure on family savings if employment is delayed or doesn’t offer sufficient income to cover the EMI payments,” Mishra states.
Rathi adds, “I have noticed that when individuals approach NBFCs, they end up being charged a significant amount, not immediately but later during the loan period. This results in a heavy financial burden, impacting the parents' or students' EMI once they start their education and subsequent careers.”
Despite the minimal difference in the cost of education between Indian and foreign institutions, the EMIs tend to become unmanageably high. “This is why I believe that taking a loan to fund a child's education may not be a wise decision. This is something that needs to be planned from the beginning,” he states.
Studying abroad not only entails significant tuition fees but it also comes with living costs and additional expenses that students and their families must calculate. These costs may typically exceed what students can afford on their own. To bear these additional expenses, many NBFCs provide loans that cover both tuition and living costs.
Says Sonal Kapoor, Chief Commercial Officer at Prodigy Finance, an international student lender, “Taking a loan for tuition and living expenses will add up to the total amount you need to pay after graduation. Carefully consider the repayment period and your post-graduation income to make sure you can repay the loan.”
“Students can also look into scholarships, grants, and part-time work (depending on visa eligibility) to reduce the need for loans to cover living costs,” she adds.
How to calculate these added costs?
When you apply to universities, the confirmation letters and brochures typically provide a detailed breakdown of expected costs upon request. This is referred to as the “Cost of Attendance”. Students can specifically request the same to create an estimate.
CoA covers almost everything like accommodation, food, transportation, books, mandatory medical insurance and other miscellaneous expenditures. “However, the CoA varies widely between universities and countries. Researching the cost of living in your host country can help you estimate these expenses more accurately,” Kapoor states.
When parents are seeking an education loan from an NBFC, it's crucial to avoid over-borrowing and ensure that they can comfortably manage their financial commitments. “One of the key factors is borrowing only what is necessary. Parents should take the time to carefully assess how much the EMI will be as a percentage of their monthly income,” Mishra advises.
Before burrowing parents should total up all existing loan obligations and check what proportion of monthly income is going toward repaying loans. If the total EMI from all loans becomes too high, it leaves little room for contingencies or unexpected financial shocks. This could put a significant strain on family finances.
“If parents have been saving money over the years, that can act as a buffer, reducing the amount they need to borrow. It’s always better to be conservative and ensure that there is a well-planned cash flow to manage monthly payments,” Mishra opines.
Since NBFCs continue to churn out quick loans, can it increase the chances of defaults? How will this affect borrowers?
Rathi says that defaults are likely to occur. “We have not seen many defaults on education loans, but due to the increasing speed of loan approvals, I anticipate that default rates will slowly rise. They will undoubtedly be higher than before, which will grab the attention of the RBI, leading to more restrictions being put in place,” he adds.
On its impact on borrowers, Rathi says that these restrictions could include stricter eligibility criteria for them, caps on loan amounts, or increased scrutiny on the use of loan funds.
Therefore, it is important for families to weigh in on their options and see their feasibility while making such decisions.