By Sunil Dhawan
The cost of education, especially higher education, is increasing day by day. Sample this: In April, 2016, tuition fee for undergraduate education in IITs was increased from Rs 90,000 per annum to Rs 2 lakh per annum. Similarly, a medical, engineering or a management course costs anywhere between Rs 10 lakh and Rs 20 lakh in India today, while the cost goes up to Rs 50 lakh for similar courses abroad.
Whatever be the case, self-financing the education of one’s child is the best option. But at times, one falls short of meeting the entire cost. An education loan comes to one’s rescue as it can help bridge the shortfall. But you should start enquiring and searching for an education loan when your child is busy applying to different institutions and is appearing for the exams. Most institutes conduct exams which have to be cleared before the admission of students.
Start Searching: One can take an education loan not only from banks but even from other eligible institutions. Most institutes have a tie-up with such lenders to offer educational loans. Further, they have an approved list of courses and institutions that helps in the faster processing of an application with favourable terms and conditions. It also helps as lenders would have done some due diligence of the institutions.
Factors to consider: One is required to pay processing charges and margin money as well as provide a suitable collateral security while taking an education loan.
However, there are courses or institutions for which banks may waive the fee, and won’t seek any margin money or collateral security. The lenders on their part largely consider these four things while providing loans –academic performance of the student, university and course, collateral being offered and the co-borrower’s profile.
Most lenders offer floating rates of interest. The actual interest rate further depends on parameters such as type of courses, institution, student’s academic performance, collaterals, credit score and the country of study.
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Repayment options: The repayment schedule of an educational loan differs from that of other loans. EMI’s are not required to be paid immediately as there is a moratorium period, i.e. a period where no EMI’s are to be paid. It is generally equal to the length of the course. During this period, only simple interest has to be paid. Actual EMI’s begin after the end of the course. Manavjeet Singh, CEO & Founder, Rubique.com says, “Every loan has a different grace period. One cannot start repaying the loan amount immediately after getting a job. A bank starts imposing interest from the time of the loan disbursement by the end of each year or may be a semester. This increases the debt burden. Therefore, if possible, some interest amount can be paid off during one’s study period to decrease the debt burden.”
How much can be borrowed: The maximum amount of an education loan is set by the Indian Banks’ Association, which is Rs 10 lakh for studies in India and Rs 20 lakh for studies abroad. However, it is up to the banks and other lenders to fix a higher amount depending on the course and the institute. For courses offered by premier institutes, lenders resort to financing a higher amount compared to the courses offered by other colleges.
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Guarantee and collateral: On an education loan up to Rs 4 lakh, collateral security may not be required. However, there has to be a co-borrower to the loan who can be the student’s parent. For a higher amount, say between Rs 4 lakh and Rs 7.5 lakh, apart from co-borrowers, the lenders may ask for a third-party guarantee. For a loan amount in excess of Rs 7.5 lakh, the bank generally asks for pledging securities of an equal value, which could be property papers, post office savings products, life insurance policies, shares or mutual funds, and bank deposits, amongst others.
Collaterals, however, may not be required in many cases. Depending on the courses and the institute, lenders may not ask for the collateral at all.
Margin money: In some cases, you may be asked to furnish margin money (for loans above Rs 4 lakh) which could be up to 5 percent of loan amount for courses in India and up to 15 per cent for studying abroad. In case of a few banks, there is no requirement for the margin money and they may be willing to fund up to 100 per cent of the student’s fees.
The prudent approach: Singh advices, “No matter whatever your debt situation be, you need to know how much you owe to the bank. Every loan might have a different interest rate and a different repayment rule. Once you are aware of the total amount you need to repay along with the specifications, a plan can be devised to repay it.”
The most important part of an educational loan is that one has to keep paying simple interest during the course. If skipped, the interest keeps accumulating. Parents can make the interest payment and may even avail tax benefits on such interest payments under section 80E of the Income Tax Act, 1961. Naveen Kukreja ,CEO& Co-founder, Paisabazaar.com says, “Interest calculation on education loans starts as soon as the amount is disbursed to you. However, it gets accumulated till the end of the moratorium period. Once you start paying interest, you can start claiming tax benefits.”
Further, there may be a concession of 1 percent on the interest rate if simple interest is paid regularly. After the moratorium ends and the student starts earning, the student can pay his/her EMIs to the bank. For availing the tax benefit, there is no ceiling on the interest amount and such deduction from income can be availed up to eight years. However, principal repayment doesn’t get any tax benefits. Singh cautions, “These deductions can be availed by an individual in whose name the loan has been taken. If your parents, spouse or sibling have taken the loan for your studies, then you are not entitled to get any tax benefit.”
What to do: Get an estimate from the bank of the tenure of the loan as well as the EMIs that need to be paid after the course ends. Ideally, the EMI should not be more than 25 percent of one’s expected net-take home salary. Thus, an education loan covers the entire cost of the course and not just the tuition fees. Kukreja suggests, “Ensure that the total loan amount has the provision for tuition expenses, living expenses and overhead expenses such as cost of travelling, purchasing equipment and books.”
Taking an insurance cover against the loan is advisable, preferably though a pure term insurance plan. Make sure that all interest and principal repayments are made on time to ensure a clean credit score. Remember, it’s the student’s first loan and a good credit history will help him/her avail any other loan in the future.
Source: Economic Times
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