Quality higher education lays the foundation for a promising career. However, the rising cost of education has rendered it out of bounds for most people. As a result, most have to finance their higher education through education loans from banks or NBFCs. However, as your education loan can run into several lakhs, you may remain in debt for several years of your initial career. Moreover, there is always a risk of not finding a job immediately after completing the course. This makes it critical to carefully analyse the loan features and take an informed decision regarding loan amount, repayment, interest rate etc.
Here are some of the things that you should consider before applying for an education loan.
Pre-approved loan: Pre-approved loans can strengthen your application process, given that it serves as “proof of funds” and hence, you could consider applying for education loan before getting admission. However, certain public sector or government institutions may ask you to submit supporting documents/ proof of admission at the time of application.
Loan Amount: Your loan amount should include all kinds of cost including your course fee, hostel fee, and cost of laptop, equipment and books. The maximum loan amount for domestic and overseas courses is Rs 10 lakh and Rs 20 lakh respectively. However, some banks have started approving higher loan amount of up to Rs 1.5 crore for overseas education. Also, lenders may approve higher loan amounts for courses from reputed institutions like IIMs, IITs, ISB etc. Try to fund the course fee out of your own funds or available scholarships as far as possible in order to reduce your interest payout.
Repayment period: Repayment period commences 6-12 months after the completion of course or obtaining employment; and lenders offer terms up to 15 years for clearing the loan amount. Typically, such loans have a moratorium period of 1 year+ course period during which you are not required to pay the EMIs. However, your lender can also extend the moratorium period by two years if you cannot complete the course within the scheduled time or in case.
It is important for you to note that interest calculation starts right after the loan disbursal and the accrued interest is added to your principal amount. Thus, try to pay the interest during the moratorium period to reduce your interest payout.
Margin money: This is the amount of the course that you need to pay out of your pocket. This amount can include your scholarship money too. No margin money is required for education loans of up to Rs 4 lakhs. For loans above Rs.4 lakhs, the margin money is 5 per cent and 15 per cent for Indian and overseas courses respectively. However, lenders like SBI waive off margin money for courses in select institutions.
Rate of interest: Most lenders offer education loans on floating rate of interest and can even go up to as high as 17.25 per cent p.a. The rate of interest depends on the type of your course, institution, academic performance, your/co-applicant’s credit score and collaterals offered. Lenders charge simple interest during the moratorium period and may also offer 1 per cent interest concession on repaying the interest during the moratorium period.
Tie-up between college and banks/NBFC: Check whether your university/institute has tie-ups with banks or NBFCs for education loans. These tie-ups speed up loan processing and may also offer lower interest rates.
Estimate the future earnings to calculate the EMIs: Carefully analyse the placement history of your institution and the average pay offered. This will allow you to roughly estimate your expected monthly income and accordingly plan your EMI and loan tenure. Avoid an aggressive repayment schedule as non-payment of EMIs will reduce your credit score and your eligibility for other loans in future. Remember that you can always pre-pay your loans without paying any prepayment penalty.
Tax benefits: Section 80E of Income Tax Act allows tax deductions on interest paid on education loans taken for self, children, spouse or children under guardianship. Although there is no upper limit on this deduction, it is available for only eight years from the start of repayment. Thus, aim at full repayment within 8 years to maximize your tax benefits.
Collaterals/Guarantor of loan: Typically, lenders don’t require collaterals for education loans of up to Rs.4 lakh. For loans between Rs 4 lakhs and Rs 7.5 lakhs, lenders may ask for a third-party guarantor. However, this can be waived off too if they are satisfied with your co-borrower’s net-worth or repayment capacity. For loans above Rs 7.5 lakhs, lenders may ask for additional tangible collateral security in the form of property, mutual funds, bank deposit, insurance policies, etc.
To sum it up, try to fund your education as much as possible through your own funds. Factor in all the costs and not just the tuition fee before deciding the loan amount. Try to repay the interest during the moratorium period and maximise your tax benefits by repaying the entire loan within 8 years. Finally, check out the tie-ups between your institution and banks/NBFCs, if any, and visit online loan portals to compare the interest rate and other features before applying for an education loan.
The author Gaurav Aggarwal is Vice-President, Paisabazaar.com