Even as we anxiously refresh our mail-box waiting for the inalienable admission offer from our dream institution, we have to simultaneously deal with the question of funding these expensive courses…!!! Isn’t it..????
A barebones simplification for an education loan is, ‘funds offered by financial institutions to meritorious students so that they can pursue their basic or higher education, in India or abroad’.
So, here is a dummy’s guide to all must know about before availing an education loan: As the educational expenses are soaring, both public sector and private sector banks offer education loans. State Bank of India is the pioneer in the education loan segment. It started offering education loans from 1995 and thereafter many banks followed in its footsteps.
Banks usually sanction loans for their listed courses. Today education loans are provided for both graduate and postgraduate courses including engineering, medical, architecture, management, law, agriculture, veterinary, dental, computer, etc. Unless we have been lucky enough to get a university fee grant or some other scholarship, we might have to take recourse to an education loan to finance our education.
Before sanctioning the loan, banks look for the viability of the borrower by having personal discussions with the student, family’s assets and annual income, the type of course and reputation of the institute.
You might be wondering, education loan being a liability along with criteria, how it can provide benefits…???
But here’s is the kicker..!!!
There is a tax advantage to take education loans. Interest repayments on education loans are tax deductible. A deduction under section 80E of the Income Tax Act for the interest paid on an educational loan can be claimed.
This deduction is allowed for 7 years and the loan must be taken for higher education purposes only and the loan has to be from a financial institution or a government-approved charitable institution.
Education loan also covers:
100% College Tuition Fees payable
Exam and library fees
Books and types of equipment including computer
Traveling expenses abroad
Other reasonable expenses required to complete the course
Parameters to look for while going for an education loan
1. Repayment options:
Unlike any other loan, education loan provides the option of a moratorium period or a ‘repayment holiday’, which means, the borrower is given a leeway to repay the loan after the education course for which the loan was taken is completed.
An education loan typically has three repayment options:
• Education loan with repayment holiday. Many banks stipulate repayment within one year after completing the course or six months after getting a job, whichever is earlier.
• Interest alone is paid during the period of course. After the course completion, we start paying the actual EMI (principal and interest).
• We start repaying the loan through EMI immediately after loan disbursement, in which case we could get the loan at an interest rate lower by about 1 percent.
The repayment conditions vary from bank to bank. Therefore, discuss this with as many banks as possible to get the repayment option according to our requirements.
2. Fixed or floating rate?
Some banks offer a fixed interest rate while others offer a floating interest rate on education loan. If the difference between fixed and floating rate is only about 1 percent, it is better to opt for a fixed rate as these have shorter repayment tenures of 5-7 years.
Many banks do not offer genuine fixed interest rate where the interest rate remains fixed for the full tenure of the loan. They, typically offer a fixed rate loan with a reset clause.
This means the bank can revise interest rate whenever it feels like doing it, to ensure that we take a genuine fixed rate loan. If it is a fixed rate with the reset clause, a floating rate may be a better option.
Finally, it depends upon our risk appetite whether to opt for a fixed or a floating rate loan. If we are completely risk-averse, we should go for a genuine fixed rate education loan. However, if we strongly feel that the interest rate will go down and are willing to take a risk; we can opt for a variable rate loan.
3. Processing fee:
Most banks do not charge a processing fee for the education loan. Therefore if our bank asks for a processing fee we can request them to waive it off.
4. Prepayment fee:
Again, in almost all cases, banks allow foreclosure or prepayment of the education loan without charging a penalty if the borrower makes the payment from her/his own sources.
Many banks, especially government-owned, have special schemes for girl students. Some banks offer 1 percent lower interest rate for girl students. So checking with our bank about all special schemes can give us an edge for education loans.
Bottom line regarding education loan benefits is: Loans are a boon for the poor meritorious students but with such outstanding education loans are a matter of concern for banks. To mitigate the risk of turning Non Performing Assets, Banks came to a consensus of not providing the loan to everyone.
So there is no denying the fact that by looking for extra care before taking any educational loan from any bank and also searching for the better offer and analyzing before availing the loan, is a blessing for students…!!!
In the end, education is one of the most important parameters in our life and educating everyone will help INDIA becoming a developed country from a developing country and eventually making the world a happy and beautiful place to live.