Learning curve

The cost of higher education is steep and the graph is expected to rise in the coming years to surpass the rate of inflation. It’s not easy to fund a degree whose cost may be several times the family’s annual income. And that is where education loans come in.

An education loan is taken by a student as the primary applicant. Parents or siblings can stand in as a co-applicant. Before applying for a loan, it is mandatory to qualify for admission in a course from a recognised educational institution accredited with the UGC and according to norms laid down by the lending institutions.

The applicant for an education loan must be a citizen of India. A good academic record is preferable. The lending institution may seek relevant documents and mark sheets.

What it covers

An education loan covers payment towards the entire tuition fee, cost of accommodation, library fees, cost of books, examination fees, conveyance cost and any cost essential to the completion of the course for which the loan is required. Expenses for buying instruments, laptop/computer for completing project work and thesis, and education tours are also covered.

Amount eligibility

The loan ceiling may vary from bank to bank. Normally you can get a loan of around Rs 10 lakh for study in India, and around Rs 30 lakh for studying abroad. Some banks allow a higher amount for premier institutions such as IITs, IIMs, and AIIMS.

Collateral & margin money

For a loan amount up to Rs 4 lakh, there is no margin payment required. However, if the amount exceeds the threshold, then you may be asked to pay a margin of 5 per cent for studies in India and 15 per cent for studies abroad. If you have received any scholarship or grant, it can be allocated towards this margin fund. Normally, margin money is required to be deposited according to the disbursement timeline on a pro-rata basis. There is no security payment required for loans up to Rs 4 lakh. Only parents are required to stand in as co-applicants.

However, for loans above Rs 4 lakh (up to Rs 7.5 lakh), there is an additional requirement of a collateral security, which may come in the form of a third party guarantee. This requirement could be relaxed if the repayment capacity of the parents is more than three times the loan amount according to the latest income tax returns filing. Security norms vary from lender to lender. For loans above Rs 7.5 lakh, apart from the security amount, the bank may require a collateral such as a fixed deposit, LIC policy, shares, Kisan Vikas Patra, land, or property.

The loan document is signed by both the applicant and the co-applicant as joint borrowers. If the student is a minor, the document is signed by a parent.

Repayment schedule

The repayment of an education loan generally starts one year after the course is completed or six months after getting a job, whichever is earlier. The interest incurred during the moratorium period is added to the principle and the EMI is fixed on the basis of the entire outstanding amount. The borrower can only pay the interest accrued during the moratorium period to keep the EMI lower. There is no penalty for pre-payment of an education loan.

Discounts & benefits

If you regularly service the interest on an education loan during the course as well in the moratorium period, you get the benefit of a 1 per cent concession in the interest rate when the repayment starts. It can make a substantial difference to your total repayment because you not only reduce the principle amount by paying the interest but also pay lower interest for the entire loan tenure. Some banks allow an additional concession of around 0.5 per cent on the interest rate for female applicants.

The tenure is allowed up to 10 years for loan amounts below Rs 7.5 lakh and 12 years for loans larger than Rs. 7.5 lakh. You should apply for the maximum tenure to keep the EMI lower.

After getting a job, applicants can get tax deduction benefits under Section 80E for the entire interest paid in a financial year. There is no ceiling on this deduction. This tax benefit is available for eight consecutive years after the repayment starts.

First step

An education loan is often the first loan for many people and should be the first step towards financial discipline. By repaying it on time, you’ll enhance your own creditworthiness.