Parents as education loan guarantor - Risks and benefits

Education loans are extremely useful in covering the costs associated with higher education. Since many students may not have a credit history, most lenders insist on having a loan co-applicant.

As per education loan conditions from most lenders, a parent can easily become a co-applicant for the child. In this case, their credit history will help determine their education loan eligibility. But becoming an education loan co-applicant carries certain risks in case of a default. 

India's average education loan size is Rs 25 lakhs, which is a considerable financial commitment. Hence, it's vital to understand the risks and benefits of having a parent as an education loan co-applicant. Let's get started.

Benefits of a parental loan co-applicant

Having a parental loan co-applicant offers several noteworthy benefits. Some of the advantages are -

• Higher approval chances - When a parent acts as an education loan co-applicant, the approval chances are higher. Lenders prefer having a parent as a co-applicant as it reduces the financial risks.
• Better loan terms – You can get better loan terms with a parental education loan co-applicant. When the risk for the lenders is reduced, they can offer higher loan amounts and lower interest rates.
• Income tax benefits - As per income tax rules, the parent or the student can claim an education loan tax benefit. Herein, an exemption under Section 80E is available to those repaying the Equated Monthly Installments (EMIs). This benefit can be availed on the interest amount paid for the education loan.

Risks of a parental loan co-applicant

Having a parental education loan co-applicant carries certain risks. Some of them include -

• Financial liability - The co-applicant is legally liable for repayment if the education loan is secured or unsecured. Any discrepancy from the student can place a considerable burden on the parents. They may even have to repay the EMIs from their own funds.
• Impact on credit score – If the student is unable to pay the EMIs on time, it can adversely impact the credit score of the parent who is the education loan co-applicant. As a result, the parents can face financial problems in the future.
• Financial uncertainty – A parent becoming a loan co-applicant can affect their long-term financial stability. The additional responsibility of repaying the loan may erode the retirement corpus, exposing them to problems at later stages of life.

Factors to consider when choosing a parental loan co-applicant

Here are some key factors to consider when choosing a parent as an education loan co-applicant -

• Income - The parent opting to be the co-applicant must have a regular source of income. This will help applicants to get a higher loan amount and better interest rates.
• Age - The co-applicant must satisfy the education loan conditions regarding age requirements.  
• Financial stability – The parental loan co-applicant must have stable finances. This will ensure they can lead a comfortable life even if they must manage additional financial obligations.
• Legal issues - The parent and student must fully understand the education loan conditions. This will help avoid any legal issues or adverse impact on the credit score, in case of a default. For instance, if the EMIs are not paid on time, the lender might forfeit the collateral or file a court case.

Also read - Education loan eligibility for students: Challenges and solutions

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Conclusion
 

IDFC FIRST Bank Education Loan offers are curated to help you realise your dream of quality education. The hassle-free application process, competitive interest rates, quick approvals, and higher loan amounts make education loans from IDFC FIRST Bank the best option for you.

Click here to apply for your IDFC FIRST Bank Education Loan.



 

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