Education loan has made it possible for many students to pursue their dream to study abroad. But before one applies for the same, it is important to do one’s homework and weigh the pros and cons, says NATASHA CHOPRA
Education loan has made it possible for parents to fund their children’s aspirations that may otherwise not have been possible. Apart from the nationalised banks, with SBI leading the pack, other major private players in the banking and non-banking financial sector like Credila Financial Services Pvt ltd, Avanse Financial Services Private, Axis Bank ltd, American Express Bank are helping the students realise their dream of pursuing higher education.
Before deciding on the provider, it is important to do a thorough analysis and weigh the parameters to suit ones needs. Education loans are generally given to the student with a co-borrower who are parents but can also be other third parties as guarantors, and at times friends and other relatives too are acceptable.
Education loans generally include the costs of tuition fee, accommodation expenses, books, travel expenses, and many more based on the type of loan one opts for. Students can avail loans of up to Rs 7.5-Rs 10 lakh for studies in India and up to Rs 20 lakh for studies abroad. These figures vary from bank to bank and many banks have an upper limit of Rs 30 lakh though private bank can at times offer more too.
Generally banks have the following collateral security requirements for granting loans to students: loan up to Rs 4 lakh (no collateral security). loan aboveRs 4 lakh and up to Rs 7.5 lakh (security in the form of satisfactory third-part). loan above Rs 7.5 lakh (mandatory collateral security guarantee which is co-obligation of parents/guardians/ third-party along with the assessment of future income of the student for the payment of installments.
When applying for the loan, banks will require a list of documents to be submitted and these include; mark-sheets of the last qualification, proof of admission to the course, scheduling of expenses, bank statement for the last six months of the borrower, recent income tax assessment of at least two years and a brief statement of assets and liabilities of the borrower among other related documents as well.
While education loans may come with lower interest rates than other loans, taking loans must be done with caution and a clear plan of how the build up of interest and principle will be repaid. The rate of interest usually varies between 11 per cent to 13.5 per cent per annum. However, interest rates are subject to timely changes as per the specifications of RBI or the concerned bank unless a fixed rate is taken.
Do check out whether the interest on the loan is being charged on a daily reducing balance basis, or a quarterly reducing balance. This fact alone can be a considerable addition to the cost of the loan burden and add to the repayments.It is more prudent to draw on the loan as in installments and this alone can lead to substantial savings, rather than the drawing total sum as interest will be charged on the entire sum and not what you have availed.
Educational loans are generally repayable in five to seven years. The holiday or the waiver period is another important factor when weighing the options. While most banks will allow for repayments to commence one year after completion of the qualifications, or within six months of getting a job (whichever is earlier) there are others that will want repayments on course completion. In some private banks repayment starts immediately once the loan is disbursed.
While repayments maybe years ahead, planning for this and getting be best option available is important to ensure that the loan is repaid timely. Remember the interest starts to accumulate as soon the loan is disbursed.
There is a lock-in period of 6 months in banks for pre-closing the education loan whereas there is no such condition in the case of private financial companies. At the commencement of repayment, the accrued interest is added to the principal amount and EMIs are fixed on the total outstanding amount.
However, after commencement of repayment, the benefit of simple interest is discontinued. Additionally, after repayment starts, the borrower can claim income deduction for the interest under section 80-E.
(The writer is MD, The Chopras)