Besides interest rate and processing fee, check whether the lender will allow you to prepay the loan without a charge.
Owing to the spiralling cost of education, students are finding it difficult to follow their dreams of a foreign education, or even of studying at elite institutions within the country. However, if they do a little bit of planning and research on education loans, they should be able to meet this cost without undue worries.
To secure an education loan, the student should be a resident of India with a minimum education qualification of 10+2 years. While some banks specify the age bracket (say 16 – 35 years), others don’t.
Checklist for choosing a lender
- Is the institute and course you wish to join on the lender’s pre-approved list?
- Which elements of education cost will the loan cover?
- Is your co-applicant’s credit score good enough for you to get the loan?
- What rate of interest will apply to you?
- How much margin money and collateral will you have to come up with?
Education loans are given only on securing admission from an accredited university or college. First, check with the lender if the university under consideration as well as its course is on their approved list. Usually, preference is given to reputed institutions and courses that have good job potential.
Loans are available for most domestic courses recognised by UGC/AICTE, or the government. For pursuing international studies, under-graduate and postgraduate courses of reputed universities are usually given the green signal by lenders.
However, if the course under consideration is an offbeat one, like photography, sports engineering, music, or theatre, it may be a good idea to check with non-banking finance companies that may offer loans for such unconventional courses.
Understand the scope of the loan
Education loans usually cover the full course fee payable to the university. They also include examination fee, library and laboratory fee, hostel fee, and travel expensed to study abroad. In addition, purchase of books, uniforms and equipment is also included. Expenses incurred on buying a laptop, study tours, if they are needed for completing the course. Here, the student should look for restrictions, if any, that some lenders impose, which typically is 20 per cent of the total tuition fee.
Some banks are even ready to include the cost of a two-wheeler (up to ₹50,000) as part of the education loan. Even caution deposit, building fund or any other refundable deposit is included by some lenders, provide it is supported by a receipt from the institution. So, cross check with multiple lenders to get the most out of the loan.
Margin money and collateral
Education loans for pursuing studies domestically have an upper limit of ₹10 lakh, while it is ₹20 lakh for studying abroad, according to RBI regulations. However, the guidelines allow banks to offer a higher amount on the basis of the institute and the course under consideration. There have been instances of education loans of above ₹50 lake being disbursed, going up to ₹1 crore.
Compared to other loans, education loans have a relatively lower requirement for margin money. For loans up to ₹4 lake, there is no margin money (according to RBI guidelines). What one requires is a co-applicant with a financial income. The co-applicant can be one’s parent, sibling, spouse, parents-in-law or grandparent. However, some banks and NBFCs might outright provide 100 per cent financing for loans up to ₹20 lake or higher.
Usually, for loans above ₹4 lake, the margin money is 5 per cent for those pursuing studies in India and 15 per cent for those planning to study abroad. Some lenders include the scholarship awarded to the applicant as margin money. Moreover, collateral might have to be provided along with third-party guarantors. Residential properties, bank fixed deposit, LIC policies, National Saving Certificate (NSC) and Kisan Vikas Patra (KVP) are among the approved collateral securities.
If the co-applicant is not employed, some lenders are willing to give loans provided the student has more than three years of work experience and is enrolling for a post-graduate course.
At present, interest rates on education loans range from 10-17 per cent per annum. Shop around to find the cheapest lender in the market. Moreover, a lender does not charge a single rate. It depends on many factors like borrower’s financial status, institute’s reputation, employment potential of the course, student’s academic background, and so on. Unsecured loans are generally costlier than secured loans.
As education loans are given on a floating-rate basis (and not fixed), one needs to account for probable spikes in the equated monthly installment (EMI) while choosing the loan tenure. Loans are available for up to 15 years, which could lower your EMI and ease your repayment burden. However, going beyond eight years will mean losing out on tax benefits, as explained later.
Keep an eye on the one-time processing fee that could range from 1-1.5 per cent of the loan amount. Look out for offers that temporarily waive processing fee, and bargain hard to minimize your cost.
Allow for flexibility
Education loans usually come with a moratorium (temporary grace) period, which makes them preferable over other loan categories such as personal loans. The moratorium could be for the period of study or can extend for a year after finishing studies. During the moratorium period, some banks ask for payment of simple interest on the loan, while others don’t. However, students should start making EMI payments as early as possible to reduce their financial burden. Step-up EMI options are available nowadays where the EMI increases over time.
Pick a lender that provided some flexibility and does not put undue pressure on your finances. Moreover, find out if the lender will charge for pre-paying the loan. Go for lenders who do not charge it.
To reduce risk, buy a term policy for the student so that there is no undue financial burden on the co-applicant in case of contingencies.
Be one up on credit score
A credit score is a three-digit number that depicts your credit worthiness and the likelihood of repaying debt. If you have a high credit score, lenders will offer you lower interest rates because they trust you to pay back your loan on time and in full.
Various factors could affect the credit score of your co-applicant, which in turn will affect your chances of getting a loan, and the loan rate. Payment history, total outstanding loan and loan mix have a bearing on your credit score. So, check if there are opportunities to improve the score by reducing debt and making some outstanding payments.
Leverage tax benefits
Interest paid on education loans is allowed as deduction from total income under Section 80E of the IT Act. However, the deduction is provided only on the interest part of the EMI, and not on the principal repaid.
Simple interest paid during the period of study can be availed as a deduction from income by the parents. Once the EMI starts, the interest component of the EMI can be availed by the student as a deduction without limits for up to eight years, or until the interest is fully repaid, whichever is earlier. From a tax-saving perspective, it makes sense to take an education loan for only up to eight years.
By Mohan Jayaraman, MD, Decision Analytics at Experian Asia Pacific