Obtaining a degree is often seen as a crucial step towards securing a well-paying job. However, the rising costs of higher education have made it increasingly difficult for many to afford this investment without financial assistance. As a result, education loans have become a popular solution. Despite their benefits, these loans can lead to significant financial harm if not managed properly.
The Financial Burden of Education Loans
An education loan can provide the necessary funds to cover tuition, books, and living expenses, making higher education accessible to more students. However, the debt accumulated can be a heavy burden. According to Ooi May Sim, "a course at a local public university costs upwards of RM5,000, and a degree at a local private university costs even more". This financial strain can be overwhelming, especially for those who struggle to find well-paying jobs after graduation.
The Impact on Credit Scores
One of the most significant consequences of defaulting on an education loan is the impact on your credit score. In Malaysia, for instance, borrowers who fail to repay their PTPTN loans are blacklisted in the Central Credit Reference Information System (CCRIS), leading to a bad credit rating. This can hinder your ability to secure future loans, including mortgages and car loans, and even affect your ability to obtain a credit card.
Legal Consequences
Failure to repay education loans can also result in legal action. Borrowers may receive reminder notices, and if payments are not made, they can be charged in court. This legal pressure adds to the stress and financial instability that many borrowers face.
Career Limitations
The need to repay an education loan can significantly limit career choices and job flexibility. Graduates may feel compelled to accept higher-paying jobs that they are not passionate about simply to meet their loan repayment obligations. This financial pressure can stifle career growth and limit opportunities for professional development.
Interest Rates and Financial Instability
While education loans often have lower interest rates compared to personal loans, the interest still adds to the total repayment amount. For example, withdrawing RM10,000 from your Employee Provident Fund (EPF) to pay for education could result in a loss of RM7,908.48 in 10 years and RM22,071.35 in 20 years due to missed dividends and compounding interest . This financial instability can make it challenging to save for other life goals, such as buying a home or starting a family.
Real-Life Consequences
Consider the case of Robert, a student who took out a private loan to finance his undergraduate degree. Despite his efforts, Robert struggled to find a job that paid enough to cover his loan payments. The high interest rates and inflexible repayment options led to his default on the loan, negatively impacting his credit score and causing significant financial challenges.
Steps to Consider Before Taking an Education Loan
To avoid the pitfalls of education loans, it is crucial to take several steps before committing to one:
Determine the Total Cost: Calculate the total cost of your education, including tuition, study materials, accommodation, and living expenses.
Assess Financial Standing: Evaluate your savings, financial obligations, and potential sources of funding, such as scholarships and grants.
Research Loan Options: Compare different loan options, paying close attention to interest rates, repayment structures, and potential penalties for default.
Plan for Repayment: Consider how much you can realistically earn after graduation and whether you can make monthly loan payments without financial strain.
While education loans can provide access to higher education, they come with significant risks and challenges. The financial burden, impact on credit scores, legal consequences, and career limitations are just a few of the potential downsides. It is essential to thoroughly research and consider all options before taking out an education loan to avoid long-term financial harm.
