Banks extend education loans to deserving students to complete their higher studies, both in India and abroad. While it’s 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.