BY RISHIKA VATS
Quality education has become an essential part of a complete and successful life. For many people, it is equivalent to graduating from a top university. The cost of education is, however, increasing rapidly over the years. In fact, the cost of studying at reputed institutions is already very high and unaffordable for normal citizens. Due to this crunch of money, parents, who want to provide their children with the best possible education, invest their money in various monetary funds like – mutual funds (MFs), fixed deposits (FDs), unit-linked insurance plans (ULIPs), etc. – for the long term.
But despite all this, one may still encounter shortage of funds due to various other reasons like, inflation in the economy, losing one’s job, etc. An Education loan, therefore, plays a very important role in such a scenario by helping to bridge the gap between the shortfall and the required amount of money.
According to studies, the cost of education is rapidly increasing at an average of 15% per annum. The tentative cost of an MBA has risen up from Rs 2.5 lakh to Rs 20 lakh in 15 years. So, if the parents start saving Rs 2,000 per month for 15 years, at an average rate of 12%, they will be able to save approximately Rs 9.5 lakh only. What does an Education loan cover? The loan covers the basic course fee and other related expenses such as (university) accommodation, exam and many other miscellaneous charges.
Who can apply for the loan? A student is the main borrower of the loan. A parent, spouse or sibling can also be the co-applicant. Whom is the loan offered to? It is offered to students who want to study in India or pursue higher education overseas. The maximum amount offered for studies in India and overseas are different and varies from one bank to another. Types of courses covered under the loan: The loan can be taken for a full-time, part-time or vocational course and graduation and/or post-graduation in the fields of engineering, management, medical, hotel management, architecture, etc. Eligibility and Documents required: To apply for the loan, one must be an Indian citizen, having secured an admission into an institution/university recognised by a qualified authority in India or abroad. The applicant must have completed his higher secondary level schooling/14 years of schooling. There are many banks that offer the loan even before one has secured admission into the university. As per the Reserve Bank of India (RBI) guidelines, there are no restrictions on the upper age limit, but there may be some banks that have it. The banks require additional documents such as admission letter of the institution, fee structure, Class X, XII and graduation (if applicable) mark sheets. Some other required documents are the income documents such as salary slips or income-tax returns (ITR) of the co-applicant.
Loan financing, collateral requirement: The banks can finance up to 100 % (full amount) of the loan depending on the amount. Currently, for loan up to Rs 4 lakh, there is no margin money required as such. For studies in India, 5% of the required money has to be financed by the applicant. On the other hand, for studies overseas, the required margin money is 15%. The banks also asks for collateral for loans above Rs 7.5 lakh. At present, the banks do not ask for any collateral or third-party guarantee for loan up to Rs 4 lakh. For the loans above Rs 4 lakh up to Rs 7.5 lakh, a third-party guarantee is required. A collateral is asked for the loan exceeding Rs 7.5 lakh. Once the loan application is accepted, the banks disburse the amount directly to the college/university as per their given fees structure. Interest rate The banks use the Marginal Cost of Funds based Lending Rate (MCLR), plus an additional spread to set an interest rate. At Present (in 2017), the additional spread is in the 1.35-3% range. Repayment The Education loan is repaid by the student. Generally, the repayment starts when the course is completed. Many banks even provide a relaxation period of 6 months after securing a job or a year after the completion of studies for repayment of the loan.
The repayment period is usually between 5 and 7 years, but it can be extended beyond that as well. During the course period, the bank charges simple interest rate on the loan. The payment of simple interest during the course period reduces the equated monthly instalment (EMI) burden on the student for the future repayments.
Precautions While applying for the loan, one should also look out for the bank charges such as those related to processing, pre-payment, late payment of EMIs, etc. Most lenders generally charge a processing fee of around 0.15 percent of the loan amount.
EXAMPLE OF A MAJOR INDIAN BANK – STATE BANK OF INDIA (SBI)
SBI Student Loan
A term loan granted to Indian Nationals for pursuing higher education in India or abroad where the admission has been secured.
Features
Repayment period of up to 15 years after the Course Period + 12 months of repayment holiday*
Processing Charges
Loans up to Rs. 20 lacs : NIL
Loans above Rs. 20 lacs: Rs. 10,000 (plus taxes)
Security
Up to Rs. 7.5 Lacs: Only Parent/ Guardian as co-borrower. No Collateral Security or third party guarantee required.
Above Rs. 7.5 Lacs: Parent/ Guardian as co-borrower and tangible collateral security required.
Margin
Up to Rs 4 Lacs – Nil.
Above Rs 4 Lacs – 5% for studies in India, 15% for studies in abroad
Repayment will commence one year after completion of course.
Loan to be repaid in 15 years after commencement of the repayment.
In case a second loan is availed for higher studies later, to repay the combined loan amount in 15 years after the completion of second course.
EMI Generation.
The accrued interest during the moratorium period and the course period is added to the principle and the repayment is fixed in Equated Monthly Instalments (EMI).
If full interest is serviced before the commencement of the repayment; EMI is fixed based on the principle amount only.
Benefits under Income-tax Act The Section 80E of the I-T Act, allows for deduction on interest paid on repayment. This deduction is allowed only for the individuals paying interest on the loan for himself, spouse or children or for the student to whom you are a legal guardian. One can deduct the entire interest amount paid from their taxable income. This deduction is allowed for a maximum of 8 years. The principal amount however, does not qualify for any tax deduction.
Conclusion Taking an education loan helps you in building a good credit score as this is the first loan in a person’s life. If you repay the loan on time without any defaults then it’ll also be easier for you to get a home loan, car loan, etc., in the future
AUTHOR
Rishika Vats is a Sophomore at Kirori Mal College pursuing Economic Honours. She’s the Coordinator at GirlUp Urja and an Executive Member at FIC KMC.She’s an ambivert how loves meeting new people. Her interest areas are Dramatics and Sports.She’s a firm believer of the saying that everything happens for a reason and to live life to the fullest!
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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