Thinking of taking out a student loan? Read this first
A recent survey conducted by Sanlam revealed that more than 90% of participants viewed education as key to their future success. But with the rising cost of tertiary education, is taking out a student loan worth it? Consider these points before going ahead.
Student loan vs personal loan
Student loans are tailored to the needs of students and their parents or guardians, whereas personal loans are set transactions with a credit provider or financial institution for more general purposes.
Russell Dickerson, president of the Debt Counsellors Association of South Africa, says: “Student loans have more flexible conditions in terms of time periods. The one bank I know grants a new student loan for each year of study.” Unlike a personal loan, many student loans offer repayment terms where you only need to start paying back the borrowed amount after you’ve completed your studies and are able to work.
“A student loan normally carries a lower interest rate than personal loans,” says Ayanda Ndimande, strategic business development manager at Sanlam Personal Loans. That said, she emphasises the importance of researching different student loan providers to find the one best suited to your study plan and your pocket. “When deciding on taking the student loan, do your homework. Compare interest rates and the repayment processes.”
The application criteria
One of the things to look out for to distinguish between a student loan and personal loan is whether proof of registration at a tertiary institution is an application requirement. “You will need to supply tertiary institution registration details to qualify for a student loan,” says Dickerson.
With lower interest rates and the intention to upskill and improve your future earning potential, taking out a student loan can be worth the short-term debt for long-term financial success. “A student loan can pave the way towards empowering yourself and your loved ones,” says Ndimande. “This is a great example of responsible credit, if credit is required to pay for these costs.”
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What interest rates can I expect?
Student loans generally carry lower interest rates compared to personal loans, but this doesn’t mean you should forego researching the different loan providers. Shop around for the loan that has low interest and terms and conditions that suit you, says Dickerson. “Be aware that there are some high-interest loans that are called education loans but are really just expensive personal loans. They often do not even have deferred payment terms,” cautions Dickerson. Always ensure you take a loan from a registered credit provider or financial institution with a good reputation.
The responsibility of a surety
If you’re entering into a loan agreement, you’re likely to be asked to include the details of a surety as part of the contract. This protects the lender from any defaults on payment you could make. “A surety binds that person to stand in for the repayment of the loan should the lender default on payment,” explains Dickerson. Many sureties pay the interest portion for the period of the loan to prevent it growing too much, until [the student] graduates and starts working.
Before approaching the person you have in mind, take note that a surety is a legal instrument. “Very often [the loan] is for a child and the bank won’t grant it unless a surety is signed, so people sign without considering the consequences,” says Dickerson, “the most serious of which is that at a time when you are not financially prepared, you may be required to pay back a loan.”
While a signed surety could argue that the student can repay the loan after three years, the truth is that the future is unpredictable. You don’t know if, for example, they could fall ill after their studies and will therefore be unable to work and repay the outstanding balance. If you sign surety, you must be able to pay back the loan on the loan applicant’s behalf in the case of an emergency.
Repayment plans: your options
Dickerson and Ndimande suggest some key considerations before choosing a repayment plan suited to you. First look at your affordability: how much of your salary after your studies can go towards repaying the outstanding loan balance. “If you are sure of an annual increase, then you could build that in,” says Dickerson.
Then calculate how many months it will take to repay the capital amount (the original amount you’ve borrowed), plus interest and account charges.
Finally, prioritise settling of debt if you do get access to more cash during the repayment term. “If the amount that you originally agreed to becomes easily payable, then increase your repayments and pay the whole loan off earlier, saving on interest and fees,” says Dickerson.
Alternatives to student loans
“Before taking out any sort of loan to finance your studies, explore all your options,” says Ndimande. “First try and apply for as many grants, bursaries or scholarships as you can find and possibly qualify for.” There are some funding options with criteria, like a maximum household income, which could be worth exploring. An example, says Dickerson, is the National Student Financial Aid Scheme (NSFAS). “NSFAS is an option if the joint household income is less than R350 000 gross (before deductions). There is no surety, and flexible repayment terms when you start working, depending on your salary,” he explains. If you want to save up towards studies, a qualified financial planner is best positioned to help you create a savings plan best suited to you. Book a meeting with one today to explore your options.
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