Who is an education loan guarantor? Meaning, role, and responsibilities explained

Education today in India has become more expensive, especially for those who enrol in prestigious universities or take higher education abroad. Education loans sometimes act as a financial lifeline for students pursuing academic dreams. But what happens when, in the case of education loans, the bank wants additional assurance. A lesser-known, but crucial, stakeholder in the borrowing process, is the education loan guarantor.

Who is an education loan guarantor?

An education loan guarantor is absolved by agreeing to be responsible for repayment of the loan if the borrower does not pay. You could think of them as the lender's financial safeguard. Most education loans in India, have long terms of years, typically require a guarantor.

Difference between guarantor and co-applicant

Guarantors and co-applicants can often get confused. A guarantor is only responsible in the instance when the principal borrower defaults, whereas a co-applicant is responsible for paying back the loan from the onset. However, the guarantor may suffer a considerable amount of financial and legal disparity.

Why do banks ask for a guarantor?

Banks seek out guarantors in order to minimise their loan risk. A guarantor with a stable income and a solid credit history gives students within collateral or a stable income the assurance that the loan will be repaid, either by the borrower or the guarantor.

Benefits of being a guarantor

• Making a loved one's potential real: The student can get accepted, pay the fees, and pursue higher learning on your behalf.
• Moral & emotional reward: Assisting a family member with their education will give you satisfaction and pride.

Risks of being a guarantor

• Legal & financial obligations: If the student does not pay back the loan, the bank will require repayment from you as the guarantor, resulting in potentially an official notice.
• Impact on credit score: If the student does not repay and has missed EMIs and defaults, it will also have a negative impact on you as the guarantor, in addition to the student's credit score.
• Impact on the guarantor's loan eligibility: Guarantor status is a liability for lenders, so you may be ineligible or less attractive for home, auto or personal loans.

Precautions before saying yes

• Detail the loans, especially interest rates, repayments and moratorium periods.
• Use your loan account or a bank alert to check loan repayments.
• Do not financially overcommit by guaranteeing too many loans.

When is it reasonable to withdraw?

Withdrawing as a guarantor is a reasonable financial decision if:

1. You already have high-level loans.
2. We are managing to increase your credit score.
3. You may wish to use credit for your own personal aspirations shortly.

In conclusion, while being a guarantor for an education loan is a little considerate act, it also has issues attached to it. Such a role requires the same care as the concern in the Indian financial system where familial ties often intermingle with financial issues. Understand the commitment, think of the risks, and act prudently.

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