Nevertheless, despite diligent financial planning, the possibility of encountering a shortfall remains. In such circumstances, an education loan emerges as a crucial resource, bridging the divide between available funds and the required amount. Research indicates that the cost of education is escalating at an average rate of 15% per annum. For instance, the estimated cost of an MBA has surged from ₹2.5 lakh to ₹20 lakh over 15 years.
What expenses does an education loan typically encompass?
An education loan typically covers the essential course fees along with ancillary expenses such as college accommodation fees, examination fees, and other miscellaneous charges.
Also Read: How to plan educational loan repayment effectively? MintGenie explains
Who is eligible to apply for an education loan?
The primary borrower for an education loan is the student themselves. However, a parent, spouse, or sibling can also act as a co-applicant, supporting the student’s loan application.
For whom is the loan available?
Education loans are available to students seeking to pursue their studies either within India or abroad. The maximum loan amount offered for domestic and international studies varies among different banks.
What types of courses are covered by the loan?
These loans can be availed for a variety of courses, including full-time, part-time, or vocational programs, as well as undergraduate or postgraduate studies. Eligible fields of study may include engineering, management, medicine, hotel management, architecture, and more.
Also Read: From Tuition to Takeoff: The essential checklist for education loan applicants
What is the eligibility criteria?
To be eligible for an education loan, the applicant must be an Indian citizen who has obtained admission to a college or university recognized by a competent authority in India or abroad. Typically, the applicant should have completed their higher secondary level schooling. While some banks may offer loans even before admission is secured, it’s essential to note that as per Reserve Bank of India (RBI) guidelines, there are usually no restrictions on the upper age limit for loan applicants, although individual banks may have their own policies regarding this.
What are the documents required?
Banks typically require additional documents alongside the application, including the admission letter from the institution, a breakdown of the fee structure, and academic records such as Class X, XII, and graduation (if applicable) mark sheets. Additionally, income-related documents such as salary slips or income-tax returns (ITR) of the co-applicant are usually requested.
How is loan financing and collateral requirements?
Banks have the flexibility to finance up to 100% of the loan amount based on various factors. Currently, for loans up to ₹4 lakh, no margin money is required. However, for studies within India, the applicant must finance 5% of the required amount, while for overseas studies, the margin money requirement increases to 15%. Collateral is typically required for loans exceeding ₹7.5 lakh.
Currently, banks do not ask for any collateral or third-party guarantee for loans up to ₹4 lakh. For loans above ₹4 lakh up to ₹7.5 lakh, a third-party guarantee is necessary. Collateral is requested for loans exceeding ₹7.5 lakh. Upon acceptance of the loan application, banks disburse the funds directly to the college or university according to the provided fee structure.
What would be the interest rate?
Banks typically determine the interest rate for education loans by using the marginal cost of funds based lending rate and adding an additional spread. As of 2017, this additional spread typically falls within the range of 1.35% to 3%.
What are the repayment terms?
The responsibility for loan repayment typically falls on the student. Repayment usually commences upon completion of the course. Some banks offer a grace period of six months after securing employment or a year after completing studies before repayment begins. The repayment period typically spans between 5 to 7 years, although extensions beyond this duration are also possible.
Also Read: How to elevate education loan savings through Section 80E? MintGenie explains
What precautions to consider?
When applying for a loan, it’s crucial to be mindful of additional charges levied by the bank, such as processing fees, prepayment fees, late payment penalties, etc. Typically, lenders charge a processing fee of approximately 0.15% of the loan amount. Being aware of these charges and understanding their implications can help borrowers make informed decisions and avoid unnecessary financial strain during the loan repayment period.
What are the benefits under the Income-Tax Act?
Section 80E of the IT Act provides for a deduction on the interest paid during loan repayment. This deduction is applicable to individuals who are paying interest on the loan for themselves, their spouse, or their children, or for students for whom they act as legal guardians. It’s important to note this provision as it can offer significant tax benefits to eligible borrowers. You can deduct the entire amount of interest paid from your taxable income. This deduction is permissible for a maximum of 8 years.
However, it’s important to note that the principal amount does not qualify for any tax deduction. This provision can be advantageous for borrowers seeking to reduce their taxable income and manage their financial obligations effectively.
Also Read: 5 interesting facts that students seeking an education loan must know
In conclusion, opting for an education loan offers more than just financial support for your academic pursuits. It also serves as an opportunity to establish a positive credit history, especially considering it’s often the first loan in a person’s life. By diligently repaying the loan on time and avoiding defaults, you not only fulfil your educational aspirations but also pave the way for easier access to other types of loans in the future, such as home loans or car loans. Thus, an education loan not only facilitates your educational journey but also lays a strong foundation for your financial well-being in the long term.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited
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Published: 23 Apr 2024, 10:53 AM IST