With financial institutions advertising low-interest rate loans, many are of the perspective that if there is a beneficial time to borrow, it may be now.
One such avenue of borrowing that is being considered – is that of an education loan. With terms like collateral, margin, and other popular jargons in most loan advertisements, you may have some questions about what an education loan really is and how you can get one. Here’s a simplified breakdown of it all.
What is an Education Loan?
From schools to high-end universities, the cost of education is only on the rise. And, as parents strive to provide their children with quality education — that will be a doorway to higher salaries, better jobs, placements in better companies, and more — an education loan comes handy when savings are not enough.
Simply put, an education loan helps parents and students bridge the financial gap between their savings and the price they need to pay for higher education in India or abroad. This price includes the university fees, cost of books, accommodation costs, tuition expenses, examination fees, and other charges involved in completing the education course that the student is applying for.
An education loan is taken on a student’s name, making them the primary applicant. However, it also requires an additional cosigner that can be a parent, guardian, sibling or even a spouse.
What to Keep in Mind While Taking an Education Loan
An education loan can be good debt when it is utilized well or leveraged to maximum advantage by keeping in mind its features. And, here’s what you can take note of, for an education loan.
- Banks can offer you enough credit to cover the whole cost of education, depending on the amount that you need.
- You may need to pay for a portion of the total education cost from your pocket. This can be around 5% if the educational institute is in India and 15% if it is out of the country.
- Collateral may be involved in acquiring an education loan depending on the amount you need. In order to have some guarantee that you will repay the high loan amount that you are borrowing, some financial institutions may require you to mark a valuable asset as collateral in order to sanction your loan.
- Like other loans, an education loan must be repaid by the primary applicant — the student. This makes it the student’s responsibility to see to it that the loan is repaid and on time to the borrower — the financial institution that sanctioned the loan.
- Repayment for the loan or the equated monthly instalments (EMIs) you will pay are structured to start after the education course is complete. Some financial institutions also offer students the advantage of beginning repayment a few months after they have completed the education course or secured a job.
- Like all loans, education loans come with a rate of interest that is part of the EMIs that the student later pays to repay the loan. This may be a lesser rate of interest if the applicant is a female student. Some banks require students or parents to start paying this during the course so that the EMIs are smaller and easier on their wallet after they have completed the course. Students belonging to the economically-backward class can also opt for subsidies to avail a lower rate of interest by reaching out to government banks instead of others.
- The loan amount is expected to be repaid during the agreed tenure. While availing the loan, the financial institution is clear about the time that the student or parent can take to repay the loan. This is called the tenure. While the usual tenure for an education loan is up to 8 years, the tenure can later be extended further with approval from the financial institution.
- Education loans offer tax deductions. The interest portion of the loan can be claimed as tax deductions under Section 80E of the Income Tax Act for up to eight years. This deduction can be claimed by the student or their cosigner. This will require a certificate, declaring the interest amount, from the financial institution sanctioning the loan
- The sanctioning of the loan, and the interest and tenure that it is offered at, can depend on the applicant’s and co-signer’s credit score, history with the bank, the documents offered to showcase the loan requirement, the collateral offered, the guarantee a third party is offering the institution on your behalf and other factors. Speaking with a bank representative to find out these exact details can help you get the best loan offering for your needs
- Read the fine print. Just like every investment and credit offering, education loans come with a set of terms and conditions too. To make sure you avoid needless penalties and charges, it is advisable to go through the fine print before you sign any paperwork. This also helps you ask the questions you need to gain more clarity on your loan offer from the bank or financial institution involved.
What Makes You Eligible For an Education Loan?
An education loan is offered to any applicant that is eligible to request it. Here’s a quick look at what most financial institutions require of you to sanction the loan.
- You need to be an Indian resident.
- You should have a document from the university that you wish to admit yourself or your child to, that serves as proof of acceptance into the educational institute. This can be a letter that says you have gotten admission or one that says your application for admission was approved.
- You will need to submit documents of prior education courses that have been completed from recognized institutes. This may be your 10th/12th standard passing certificates or higher education passing certificates.
It may also help for the applicant and the cosigner to keep your know your customer (KYC) documents of identity and residence ready, along with your past marksheets. Financial institutions may also require the co-signer’s income proof and the documents of the collateral, if there is one.
What Alternatives Exist To Education Loan?
As an education loan’s amount can depend on the family’s income and that involves repayment with interest, some parents may also turn to relatives as an alternate fiscal source. This may not be advisable as it can turn relationships sour over time.
Some alternate ways of financing higher education are marking investments, land and property as collateral to get a loan sanction or a higher loan amount. Some families may even resort to selling gold or redeeming their investments while others settle for admission in a more budget-friendly university instead.
The ideal way to ensure that you aren’t entirely dependent on an education loan is to start saving toward the education course in advance and have a reserve available by the time of admissions. Investing takes savings a step further, offering you a chance to cope with the increasing costs of education and also helping you grow your savings. It is also equally important to choose investment tools that offer a return rate that exceeds the rate of inflation to ensure that your savings don’t lose value over time.
Bottom Line
While early saving and investing can certainly help lighten the financial load that a quality education demands, some parents may not have the chance to do so as they’re already faced with admissions. In such cases, an education loan may be ideal.
However, along with drawing out a good repayment plan, ensuring that the right course, university, and financial institution is chosen can help increase the chances of easy repayment of the loan, making the student debt-free sooner than later.
