Reading an education loan agreement before you sign

The moratorium or grace period is a unique feature of education loans that allows students to delay principal repayment until after their course ends. In India, this usually lasts for the course duration plus six to twelve months, whereas in the US and UK, grace periods vary based on whether the loan is federal or private.

It is important to clarify if interest continues to accrue during this period. Simple interest might be charged during the study years, which is then added to the principal for EMI calculations later. Always check if you can make voluntary payments during this time to reduce your long-term debt burden.

Loans are typically tied to a benchmark rate like the Repo Rate in India, SOFR in the US, or SONIA in the UK. A spread is added to this benchmark to determine your final interest rate. You must identify if your rate is 'fixed', staying the same throughout, or 'floating', which changes with market conditions.

Floating rates are more common and carry the risk of increased monthly payments if central banks raise rates. Ensure the agreement specifies how often the rate is reset and what notice the lender must provide before changing your monthly commitment.

• Identify the benchmark rate used (e.g., MCLR, RLLR, or SOFR).
• Check the spread or margin added to the base rate.
• Verify the frequency of interest compounding (monthly vs annually).
• Look for a 'cap' on how high a floating rate can go.
• Confirm if you have the option to switch from floating to fixed later.

The agreement will outline how the money is paid out. Most lenders pay tuition directly to the educational institution rather than the student. Funds for living expenses or books might be deposited into a personal account in installments.

Be aware of conditions attached to future disbursements. Lenders often require proof of academic progress, such as mark sheets or transcripts, before releasing the next semester's funds. Failure to maintain a certain grade point average could lead to a halt in funding.

The repayment section defines your Equated Monthly Installments (EMIs) and the total tenure. In the EU and UK, student loans are often income-contingent, meaning you only pay back once you earn above a threshold. In the US and India, payments are usually fixed regardless of your starting salary.

Prepayment allows you to pay off the loan early. You should ensure there are no 'prepayment penalties.' In many jurisdictions, regulators have banned these penalties for floating-rate individual loans, but they may still apply to fixed-rate loans or corporate-backed schemes.

• Calculate the total cost of the loan including interest.
• Verify if partial prepayments are allowed without extra fees.
• Understand the process for requesting a repayment extension.
• Check for life insurance requirements often bundled with the loan.
• Confirm the 'Late Payment Fee' for missed installments.

Most student loans require a parent or guardian to sign as a co-borrower. This means they are equally responsible for the debt. If the student fails to pay, the lender will legally pursue the co-borrower, which can impact their credit score and assets.

Some contracts include a 'co-signer release' clause. This allows the co-borrower to be removed from the contract after the student has made a specific number of timely payments and met credit requirements. Always look for this to protect your family's financial future.