Education is one of the greatest gift a parent can bestow upon their children. As the saying goes “Buy a man a fish, he will eat for a day. Teach him to fish, you feed him for a lifetime.” If you give a child the proper education, you set them up for life.

The problem with education now-a-days is that it is very costly. Parents are finding it very difficult to pay the fees each year that is required for their child to be studying in one of the elite institutions in the country. This is the reason for the inception of education loans.

What is an education loan?

Education loans in India has been available from 2001 and many students have profited from it. Education loan is where the bank pays your fees for your education which after graduation you must repay. The loan amount tenure and interest rate depend on the college you are joining. The better rated the college the lower the interest rate.

Recent studies show that the number of defaults on education loans have started to increase which is leading more and more Non-Performing Assets(NPA) for banks. The reason for these defaults are

1.       Student did not get placed after graduation

2.       The EMIs are high that they are not able to pay

3.       Parents who are the co-borrowers of the loan do not pay the loan

The above mentioned-issues faced by the students are due to high amount of fees in lower rated colleges and getting placed in low income jobs. Parents are at the end of their careers and cannot afford to pay the loan amount. These issues have led banks to make the approval process for education loans a little stringent.

Credit score of parents to be considered

Banks are going to check the credit scores of parents. Since students will not have any credit scores, the parents who are going to be the co-borrowers of the loan should have very good credit scores to be eligible for an education loan. If the score of the parent is not good, then the loan will be rejected.

Why does credit score affect my loan application?

However, a bank may market itself, it still likes reliable borrowers. They want people or organizations who will pay their due month on month and on time. To know if you are that person they will check your credit report and credit score.

Your credit report contains all your credit history –

·         Have you taken loans before?

·         How did you go about completing it?

·         Did you miss any payments?

·         Are there any bad remarks on your report?

·         Do you have any other credit account active?  

With so much information already available about you on your credit report banks will determine how dependable you are and decide on your loan plan.

Factors That affect your credit score

·         Payment history – The most important factor. How regular you are on your loan payments

·         Amounts owed – Having very high debts or maxing out credit cards with dues continuing for many months will have a negative impact on your score

·         Length of credit history – The longer the credit history, the higher the credit score

·         Credit mix – With different types of loans available (credit cards, car loan, personal loans etc.) CIBIL™, Equifax, Experian and CRIF High Mark. needs a debt to determine your score

·         New credit – Taking out credits within short time increases your credit risk

Conclusion

With the cost of education rising each day taking a loan is going to be the only option to provide children quality education. Parents need to keep this in mind and take care of their credit score so as to not have a problem when they are applying for an education loan.