The value of student loans
There are multiple reasons why it might be better for students to consider financing their investment in education, as opposed to paying cash upfront, according to Johan Wiggins, CEO and co-founder of Student Hero.
“The primary reason to finance your studies would be because it enables you to hold onto your savings for a rainy day, while using a finance provider's resources to pay the educational institution. If you have to apply for finance out of necessity, then the extended repayment term associated with financing can significantly reduce the monthly payment in line with what is comfortable for your particular financial situation.”
However, seeking out financing for your education doesn't even have to be out of necessity. It might simply be more comfortable for an individual to pay a lower instalment to avoid sacrificing too many of their creature comforts. “We’ve all heard the stories about students who survive on two-minute noodles and bread. This doesn’t have to be the case with all of the financing options that are available today.”
To determine whether financing is the right option for the student’s situation, Wiggins recommends weighing the costs associated with funding or financing their education against the increased earning potential induced by studying. “Whatever the reason may be, it is important for the student to know their options and understand the qualifying criteria, terms and costs associated with the different educational finance providers.”
Student finance differs from other financial products like property and vehicle finance, and has different cost implications. Wiggins explains: “Educational finance providers appreciate how important it is to invest in education, and this is evidenced in the way that student finance is priced and repaid.”
Student finance is priced at an interest rate of prime to prime-plus-seven, which is a relatively low interest rate when compared to other finance products. However, the most unique feature of student finance is that the repayment of the principal amount applied for can, in some cases, be deferred until the student finishes their studies
“This repayment structure affords the student time to start earning an income before starting with the repayments of the principal amount,” he says. “Student finance is the most affordable type of finance offered by South African finance providers.”
There are, however, some qualifying criteria in order to take out student finance.
A finance provider will look at two things to determine whether an applicant qualifies for finance: These are the applicant’s affordability and their credit score. Simply put, the provider will want to establish that an applicant can afford the monthly finance instalments.
Affordability is calculated by deducting fixed expenses, such as rent, insurance premiums and other credit commitments from your net income. The surplus has to be more than the finance instalment.
“Funding providers also consider your additional income, such as commission, a bonus or rental income, and even allow you to add a second sponsor's income as part of the affordability calculation. For this reason it’s important to notify the finance provider about the availability of additional or a second household income.”
He points out that a perfect credit score is not necessarily required in order to qualify for study finance. “Different providers each have a unique qualifying criteria, some more relaxed than others.”
Students who are uncertain about their credit score or affordability should reach out to a provider of education finance for a pre-qualification, after which they can weigh your options. Wiggins says: “The most important thing to keep in mind for first-time students or their financial caregivers is that the student does not have to be a registered student before engaging with an education finance provider.”
Most providers offer free advice to students wishing to apply for finance for the balance of their current fees, or to finance further years of study but unsure about whether they can or can’t apply for finance.
“Students wanting to apply for study finance – or find out if they qualify – can ask their student advisor to assist or apply via our website,” says Yolandi Kruger, National Business Development Manager at CTU Training Solutions.