Helping hand

Written by Adhil Shetty | Updated: Oct 15 2013, 10:07am hrs
Banks extend education loans to deserving students to complete their higher studies, both in India and abroad. While its one of the easier loans to avail, there are specific things one needs to keep in mind.

Fixed or floating Education loans, like any other loan, can either be at a fixed or floating rate. The borrower should keep in mind his risk appetite and the prevailing economic situation before making a choice. Fixed rate loans usually have a slightly higher interest compared to the existing floating rate interest.

If the interest gap between the two loans is 1% or less, you can opt for fixed loans as the repayment tenure of education loans is low at 5-7 years. If you do not mind taking some risk and expect interest rates to fall in the near future, you can opt for a floating loan. On the other hand, if you do not want to see regular variations in your EMI and are risk averse, it is better to take a fixed rate loan.

A fixed rate loan should not have a reset clause attached, wherein banks revise interest rates upwards after a certain period. In such a case, you should stick to floating rate loans. In the current scenario, where interest rates are likely to move up, it is better to opt for a fixed rate loan.

Tax benefits: Under Section 80E of the Income Tax Act, you can claim a deduction of the entire interest paid on the education loan in a year. However, certain conditions need to be satisfied. First, you can only claim interest as a deduction; principal repayment is not allowed. Only the person who has taken the education loan can avail of the benefit. This means if your spouse or parent has taken the loan to fund your education, only they and not you can claim the tax benefit. The loan should be from an approved financial institution or an approved charitable institution to fund higher education. Therefore, loans taken to fund school education or loans from friends and relatives are excluded.

Further, it should be a full-time course. The deduction of interest is available for eight years, beginning from the year you start making repayments/interest payments, whichever is earlier. So, if repayment extends beyond eight years, you will not receive benefits for those extra years. Lastly, the repayments should be made from taxable income to avail of the tax benefit.

Prepayment: Prepayment of education loans is recommended as it helps reduce liability as well as total interest outflow.

Prepayment is usually permissible in India without a penalty. However, some banks charge a penalty if you prepay your loan during the moratorium period. Therefore, find out about the prepayment clause from the bank before taking the loan. Prepayment penalty is generally charged if it is not done from own resources. Sometimes, prepayment beyond a certain amount attracts a fee. In such a case, you can plan your payments within this limit to avoid paying the fee. Prepayments can be planned in a way that do not affect cash flows either by aggregation of monthly salary or annually when you receive windfalls.

Taking a second education loan before the first loan is paid off: Some banks offer you a second education loan even before the first education loan is paid off. Such loans are generally offered to meritorious students. If you plan to take a second education loan for pursuing post-graduate studies, remember to perform well in the course for which the first education loan was taken.

The second education loan is granted on the same conditions as the first, including collateral and third-party guarantor requirements. Therefore, you must ensure that you have the required security as per the banks requirements. Sometimes, banks give the second loan only from the branch where the original loan was granted. Also, not all banks grant this type of loan.

Hence, make all enquiries before you take the first loan, as it is better to take the second loan from the same bank where you took the first one. This cuts down documentation procedures and leads to quicker turnaround time. Nevertheless, it is prudent to evaluate all options in the market and go with one that best suits your requirements.

An education loan is taken at a time when you are uncertain about your job and future financial position. Hence, remember to keep the above points in mind and make a careful choice.

* The writer is CEO, BankBazaar.com

Points to remember

* Fixed or floating Education loans, like any other loan, can either be at a fixed or floating rate. Keep in mind your risk appetite and the prevailing economic situation before making a choice

* Fixed rate loans usually have a slightly higher interest rate compared to the existing floating rate interest. If the interest gap between the two loans is 1% or less, you can opt for fixed loans as the repayment tenure of education loans is low at 5-7 years

* If you do not mind taking some risk and expect interest rates to fall in the near future, you can opt for a floating loan. On the other hand, if you do not want to see regular variations in your EMI and are risk averse, it is better to take a fixed rate loan

* Tax benefits: Under Section 80E of the Income Tax Act, you can claim a deduction of the entire interest paid on the education loan in a year

* You can only claim interest as a deduction; principal repayment is not allowed

* Only the person who has taken the education loan can avail of the benefit. This means if your spouse or parent has taken the loan to fund your education, only they and not you can claim the tax benefit

* The loan should be from an approved financial institution or an approved charitable institution to fund higher education. Therefore, loans taken to fund school education or loans from friends and relatives are excluded