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Today, soaring education costs are making it practically impossible for parents to fund their children’s education without resorting to an education loan. Professional courses like medical, management, engineering or IT courses cost nothing less than Rs. 5-10 lakhs per annum, while some post-graduate (PG) courses cost over Rs. 10 lakhs. Private college fees are higher than Government colleges, and courses abroad are a different story altogether.
An education loan is not only a smart financial choice, but is good future investment too. Most banks/financial institutions today offer attractive education loans on a range of courses – under-graduate, graduate, vocational or professional.
But what does taking an education loan in India exactly entail? Here are the answers:
Eligibility: The applicant must be an Indian citizen aged between 16 to 35 years, pursuing a graduate or PG degree/diploma. He/she must have a confirmed admission in an educational institution recognized by Government/University Grants Commission/All India Council for Technical Education etc. Certain vocational and technical training courses like aviation and air-hostess training are sometimes included.
Application: A student cannot apply for an education loan independently. It is mandatory to have a co-applicant with a sound financial record. The student’s parent, sibling, spouse or parent-in-law qualify here.
To get an education loan, one needs to submit the following documents with a completed application form to the bank:
• Letter of admission
• Detailed course cost break-up
• Academic records
• Duly filled in loan application form
• KYC documents and photographs
• Valid identity and address proofs of student and parent/guardian/co-applicant
• Income proof of parent/guardian/other co-borrower
• Last 6 months’ bank statements of student/co-borrower/guarantor
• Previous 2 years’ IT returns or assessment order of parent/guardian/other co-borrower, if IT payees
• Assets and liabilities statement of parent/guardian/other co-borrower
Amount: Banks in India typically lend up to Rs. 10 lakhs for education within India and Rs. 20 lakhs for education abroad. For special cases, banks may consider lending higher amounts at their discretion. For instance, for PG courses in premier management colleges in India such as the IIMs, banks give loans up to Rs. 20 lakhs. The loan size usually depends on the institute and course. The ticket-size of student loans in India ranges between Rs 2 lakhs and Rs 22 lakhs.
Security: For educational loans up to Rs. 4 lakhs, no security/guarantor is required. However, parents must be joint borrowers. For loans between 4 to 7.5 lakhs, collateral security in form of third party guarantee is required along with parents. For loans above 7.5 lakhs, parents must be joint borrowers along with the provision of a tangible collateral security, usually residential property, whose value lenders consider for sanction. The collateral could also be a non-agricultural land, FD, or a life insurance policy where the sum assured is minimum 100% of the education loan amount.
Inclusions: Education loan covers include 100% college tuition, library and exam fees; accommodation charges/hostel; laboratory; books, instruments, and equipment including computers; travelling expenses abroad; caution/refundable deposit; and other reasonable expenses required for course completion such as project work, study tours, uniform, etc.
Margin money: Borrowers need to bear some of the expenses, called ‘margin money’ by banks. This is 15% for education abroad and 5% for studies within India, both on loans above Rs. 4 lakhs. For loans up to Rs. 4 lakhs it is nil.
Sanction: Education loans are sanctioned only for education in recognized institutions. You may check the list of approved institutes with your bank. It could take anywhere between one to three weeks from the date of application receipt for an education loan to be sanctioned by the bank, provided the application is complete in all respects. Successfully securing an education loan also depends on the credit history of the co-applicant or guarantor, quality/reputation of the institute and the bank’s confidence in the student’s capability to secure a job after course completion.
Disbursement: Usually, education loans are disbursed directly to the educational institution either in full or in appropriate installments, considering the fund requirement and/or fee schedule as assessed by the bank. The borrower needs to submit a fee request letter from the institution.
Repayment: After course completion, the borrower gets a moratorium period of six months to a year, before beginning repayment. One year after course completion the repayment has to start, regardless of whether the student has secured a job or not. As an exception, engineering course students are given four years (course duration), plus an additional year to start repaying.
Interest rates: Interest rates on student loans are calculated as the base rate (9.5 to 10%) plus mark up. The total interest works out between 11.75-14.75%, depending on the bank, quantum of loan, and the institution. Banks sometimes offer better interest rates for courses in premier institutions, to outstanding or to female students.
Tax benefits: Interest paid on education loans for self, spouse or children, is eligible for deduction under Section 80E of the Income Tax Act, 1961. This applies for 8 years from the year(s) that loan repayment begins, or for the period during which the loan is in effect, whichever is more.
Points to remember:
• In case of repayment default, the guarantor/co-applicant and student both are held responsible, adversely affecting their credit history/rating.
• If the student goes abroad, the lender recovers from the co-applicant.
• For foreign courses, insurance is compulsory, increasing the cost.
Since an education loan is usually the first loan a student avails, it helps instil financial discipline. Timely repayment allows students to build good credit histories, which in turn helps immensely when they wish to take bigger credit in future such as home or car loans, credit cards, etc. Impressive credit scores can sometimes even help secure pre-approved loans.
You can get an excellent deal on your student loan if you have admission in a reputed institute, complete documents, a good credit score, and have compared offers, terms and conditions from different banks/lenders.
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