What is education loan? Here's a guide
To apply for the loan, one must be an Indian citizen, having secured an admission into a college/university recognised by a competent authority in India or abroad.
Keeping this in mind, parents, who want to provide their children with the best possible education, invest their money in mutual funds (MFs), fixed deposits (FDs), unit-linked insurance plans (ULIPs), etc., for the long term.
But despite all this, one may still encounter shortage of funds. An education loan, therefore, plays a vital role in such a scenario by helping to bridge the gap between the shortfall and the required amount.
According to studies, the cost of education is increasing at an average of 15% per annum. The tentative cost of an MBA is up from Rs 2.5 lakh to Rs 20 lakh in 15 years. So if a couple starts saving Rs 2,000 per month for 15 years, at an average rate of 12%, they will be able to save approximately Rs 9.5 lakh.
What does an education loan cover?
It covers the basic course fee and other related expenses such as (college) accommodation, exam and other miscellaneous charges.
Who can apply for the loan?
A student is the main borrower. A parent, spouse or sibling can be the co-applicant.
Whom is the loan offered to?
It is offered to students who want to study in India or pursue higher education overseas. The maximum amount offered for studies in India and overseas are different and varies from one bank to another.
Types of courses covered under the loan
It can be taken for a full-time, part-time or vocational course and graduation or post graduation in the fields of engineering, management, medical, hotel management, architecture, etc.
Eligibility, documents required
To apply for the loan, one must be an Indian citizen, having secured an admission into a college/university recognised by a competent authority in India or abroad. The applicant must have completed his higher secondary level schooling.
Some banks offer the loan even before one has secured admission into the university.
As per the Reserve Bank of India (RBI) guidelines, there are no restrictions on the upper age limit, but some banks may have it.
The banks require additional documents such as admission letter of the institution, fee structure, Class X, XII and graduation (if applicable) marksheets. Also required are the income documents such as salary slips or income-tax returns (ITR) of the co-applicant.
Loan financing, collateral requirement
The banks can finance up to 100% of the loan depending on the amount. Currently, for loan up to Rs 4 lakh, there is no margin money required. For studies in India, 5% of the required money has to be financed by the applicant. On the other hand, for studies overseas, the required margin money increases to 15%.
The banks also ask for collateral for loans above Rs 7.5 lakh. Presently, the banks do not ask for any collateral or third-party guarantee for loan up to Rs 4 lakh. For loans above Rs 4 lakh up to Rs 7.5 lakh, a third-party guarantee is required. A collateral is asked for loan exceeding Rs 7.5 lakh.
Once the loan application is accepted, the banks disburse the amount directly to the college/university as per the given fees structure.
The banks uses the Marginal Cost of Funds based Lending Rate (MCLR), plus an additional spread to set an interest rate. Presently (in 2017), the additional spread is in the 1.35-3% range.
The loan is repaid by the student. Generally, the repayment starts when the course is completed. Some banks even provide a relaxation period of 6 months after securing a job or a year after the completion of studies for repayment.
The repayment period is generally between 5 and 7 years, but can be extended beyond that as well.
During the course period, the bank charges simple interest rate on the loan. The payment of simple interest during the course period lessens the equated monthly instalment (EMI) burden on the student for future repayments.
While applying for a loan, one should also look out for bank charges such as those related to processing, pre-payment, late payment of EMIs, etc. Most lenders charge processing fee of around 0.15 percent of the loan amount.
Benefits under Income-tax Act
Section 80E of the I-T Act allows for deduction on the interest paid on the repayment. This deduction is allowed only for the individuals paying interest on the loan for himself, spouse or children or for the student to whom you're a legal guardian.
You can deduct the entire interest amount paid from your taxable income. This deduction is allowed for a maximum of 8 years. The principal amount does not qualify for any tax deduction.
Taking an education loan helps you in building a good credit score as this is the first loan in a person's life. If you repay the loan on time without any defaults then it also makes easier for you to get home loan, car loan, etc., in future.
(With Inputs from Sunil Dhawan)
Click here to check out the education loan calculator.