5 Things to Know before Taking an Education Loan

Posted by sourav on October 20th, 2018

Getting high-quality education from a reputed college is not as easy on your pocket as it was a decade ago. The cost of education has been increasing every year and this is the reason why parents and students, especially those belonging to the mid-income segment, are increasingly turning towards education loan. Nowadays, all major banks are offering education loans at highly competitive rates of interest. There are some financial organizations like Avanse and Auxilo that solely cater to the education loan demands.

With so many lenders offering varied rates and benefits, it may be confusing for a borrower. So, if you are also looking forward to get Best education loan to pursue higher studies, here are a few things you must know before applying.

1- Courses Covered

You can take education loan to cover the expenses of graduation and post-graduation along with technical, professional and vocational courses offered by colleges. Higher education in foreign countries is also covered under educational loan. Also, it is easier to secure education loan for technical and well-known courses like engineering or management than non-technical courses like filmmaking, photography, etc. So, there are two things you need to check-

•  Whether the institution you seek admission in has been listed by the bank
• Whether the applied course is eligible for education loan from the chosen bank

2- Eligibility and Documentation

Education loan is granted to students; a Resident Indian who has completed his higher secondary level schooling and secured admission in an recognized university/college can apply for education loan. However, most of the students do not earn any income nor do they have a credit history. Hence, banks require the applicants to bring a co-borrower typically parents or guardian earning regular income and having good credit history. Though RBI has not set any upper limit on the age of education loan applicants, bank might have done so.

In addition to the KYC documents such as proof of identity, address and income of the co-applicant, students have to submit letter of admission, fee structure of the course, marksheets of graduation and higher secondary. If you seek admission in a foreign college, you may also need to submit proof of Visa approval and study permits in the country.

3- Loan Amount and Collateral Requirement

Depending on the cost of education, banks may be ready to finance up to 100 percent of it. For studies in India, no margin money is required for loans of up to ₹ 4 Lakh. For loans above ₹4 Lakh, banks would keep 5 percent margin for studies in India and 15 percent margin for studies abroad. Moreover, no collateral is required for education loans under ₹ 7.5 Lakhs but for loans of higher amount, you may need to keep an asset as collateral. Banks may also ask for a third party guarantee for education loan amounts between ₹ 4 Lakh and ₹ 7.5 Lakhs.

4- Repayment

Education loan is supposed to be repaid by the student. This is the reason why repayment starts after course completion. There is also a moratorium period of 6 to 12 months after course completion to allow the student to be financially capable of repaying the loan. Simple interest is charged during the moratorium period. If the borrower chooses to pay interest during this period, he may also get concession on the interest rate. Education loan tenure usually ranges from 5 to 15 years as per the bank’s decision and the borrower’s convenience.

5- Tax Benefit

Interest paid on education loan is eligible for tax exemption under section 80E of the Income Tax Act. The entire amount of interest can be deducted from the taxable income. Only individuals who have taken the loan for themselves, their children or spouse are eligible for this tax benefit. An important point to note here is that this deduction is available for a maximum tenure of 8 years. If your repayment tenure goes beyond 8 years, tax deduction cannot be availed in the years after completing the 8 year period. In addition to this, your bank should fall in the category specified by the Income Tax Act in order to avail the tax benefit.

You must keep the above five points in mind when applying for education loan. Do not forget to ask your lender about different fees and charges related to the loan such as processing fee, pre-payment charges, etc. Being aware will help you in negotiating a better deal.

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