Here is a complete insight: “Why do many banks consider student loans risky investments?”.
Most of the time, when a student applies for loans for their education and other academic sessions, they get refused by the bank for various reasons, and risk is also one of the major factors.
In this blog post, we are going to see the reasons why student loans are considered one of the most risky investments by banks and, as a student, how you can assure yourself that student loans are not that risky.
So let’s explore.
Table of Contents
What is a Student Loan? How it is different from a normal loan.
Student loans (especially from banks) are loans that are borrowed by students so that they can their fees, and financial needs to acquire and pay textbooks, tuition, and other educational expenses.
After the completion of his education, it is mandatory to repay this loan at a decided rate of interest.
Here is how student loans are different from normal loans:
|Sr No.||Difference||Student Loan||Ordinary Loan|
|1||Purpose||For Educational Purpose||For Board Purpose|
|2||Eligibility||Required certain eligibility||Based on lender’s terms and conditions|
|3||Rate of Interest:||Low Rate of Interest||Little bit higher rate of interest as compare to student loan|
|5||Credit History:||No strong credit history required||Strong credit history required|
|6||Collateral||No collateral required||Collateral is must|
|7||Forgiveness:||Chances of forgiveness are there||No chances of forgiveness are there|
|8||Government Involvement||Has government intervention||No government intervention are there.|
How much risk is involved in student loans? – Banker Point of View
From a banker’s point of view, student loans are risky because of the following reasons.
Limited Credit History: Before lending a loan, a bank checks his creditworthiness by seeing his credit history. In the case of a student, it is very difficult to check how credible that student is. That’s why student loans are a little bit riskier as compared to other loans.
Uncertain Payment:- Nobody knows how uncertain the future is. Whether students will be successful depends on various factors, such as their academic performance, their medical health, and other factors.
Let’s say a student leaves his education due to certain influences, then there are minor chances that he would repay his loan.
This is also one of the biggest reason bank hesitate to give loans to students.
Loan Default: There are chances that after the completion of his graduation, the student won’t find a job. This can increase the chances of repayment, and hence the burden on banks. That’s why banks always check the capability of whether a student can repay their loan or not.
Loan Forgiveness Initiatives: When the government intervenes in the student loan program, there are chances that the repayment amount gets subsidized. In this case, the bank received less than what they had granted as a loan.
Market Fluctuations: The economy is uncertain, and due to its fluctuations, employment opportunities get affected.
Lack of Collateral: Student loans are granted without any security, and due to this, banks find it difficult to recover the loan amount. This makes a bank hesitate to grant a loan to a student.
Long-Term Nature: Generally, student loans are long-term in nature, and extended-period loans have more uncertainty to repay due to various factors.
Quality of Education: Banks prefer to give loans to those students who are going to study at reputed universities like Harvard University, Stanford University, the University of Oxford, the University of Cambridge, etc.
Banks give loans because they’re sure that students from this university have a quality education and can make a good career.
But if a student applies for a loan from another unknown institution, then banks become skeptical.
How to get a student loan easily A complete step
Here is the complete step-by-step solution to applying for a student loan.
FAFSA:- A complete FAFSA (Free Application for Federal Student Aid) shows how eligible the student is for financial aid. It helps to grant aid for students like work-study, loans for the payment of college fees, and scholarships.
Explore Federal Loan Options: After completion and submission of the FAFSA, after a few days, you would get a Student Aid Report (SAR), which gives details about your eligibility for applying for federal student aid.
Understand about loans: Not all loans are the same and have the same terms and conditions. Explore all of them and find one that fits perfectly with your needs. For example, learn about direct subsidized loans, direct unsubsidized loans, federal loans, etc.
Review the Financial Aid Award Letter: The Financial Aid Award Letter tells you the amount of financial aid you can get for a particular school, college, or university.
Note: If a federal loan is not enough, you can also contact private student loan providers. Don’t forget to compare rates of interest, terms and conditions, policies, and benefits from different lenders.
Credit Check Requirement: A consignor is needed to qualify for the credit check requirement if you have no credit history.
Collect Documents: Collect documents like security numbers, driver’s licenses, income information, etc.
Read the conditions: It’s important to understand the terms and conditions before applying for a loan. The necessary things are the rate of interest, repayment conditions, any fees or additional charges, etc.
Most students apply for loans without checking under what conditions they’re receiving financial aid.
Apply Early:- There are chances that loans will be granted on a first-come, first-served basis. That’s why it is important to apply for a loan in advance (preferably at the beginning of your academic term).
Sign a promissory note: Under a promissory note, the student promises to repay the loan amount, and it is a legal document.
Note: As a student, it is important to spend the borrowed amount carefully to avoid overburdening yourself at the time of repayment. Also, keep a complete record of every transaction made regarding repayment in any form, like maintaining a complete record of paying interest, etc.
Also Read:- Modo Loan Reviews. Is it Legit?
What are the documents required for student loans?
Generally, private institutions that provide student loans ask for more documentation as compared to federal student loans.
We have provided a complete list of documents you must submit to get a federal student loan as well as a private student loan.
Federal student loans ask for
First Application for Federal Student Aid: This is the first step to applying for a federal student loan. To fill out this form, you may need your social security number, record of untaxed income, and federal tax.
Student Aid Report: Receiving SAR is the second step. It is nothing but a collective report of the information you provided.
Entrance Counseling: Those who apply for federal loans for the first time might complete entrance counseling so that they can understand the terms of the loan and, as a borrower, what their responsibilities are.
Master Promissory Notes: When a student signs an MPN note, it means that he or she promises to pay the loan with the mentioned interest that he or she has taken for academics.
Private Student Loans ask for
Application Form: Private lenders have their application form. To avail of a private student loan, you should fill it out, and this is the first step to getting a private student loan.
Identity Proof: Here only government-issued identity proofs are valid, like a passport or driving license.
Social Security Number: An SSN is a number that helps lenders check your identity and credit history.
Income Proof:- Not all, but some lenders also ask for proof of income. You can submit tax returns or recent pay stubs as proof of income.
Consigner Information: If you have a consignor, then details about the consignor are needed. That’s why it is important to gather consignor information.
Loan Amount and School Information: Information about the amount requested by you is a must, and some lenders also take information about the school you’re attending. They may check the background of students in school.
Cost of Attendance: There might be chances that lenders also ask about the overall cost of attending the school you chose.
Other Financial Information: Lenders may also ask for other financial information, for example, your current financial situation, sources of income, loans taken from other banks and how you’re going to repay them, etc.
A Video on “US Student Loan Crisis”
Why do many banks consider student loans risky investments?
Overall, we can say that banks consider student loans a risky investment because students don’t need to put anything up as collateral for loans.
However, due to various external factors, some students fail to build a successful career, and hence they fail to repay their loans.
Most of the time, student loans are subsidized by the government, and hence banks receive a lower amount as compared to the actual loan amount.
Due to these overall factors, student loans are one of the most risky investments for banks.
FAQ: Why do many banks consider student loans risky investments?
What would happen if the student failed to pay his loan?
If a student fails to pay his loan, there can be late fees and penalties, credit damage, and legal action.
What is the average interest rate on student loans
The average interest rate on student loans is 4.99%–5.89%.
What is the timeframe to repay student loans.
To repay a federal student loan, it takes 10 years.