Education Loan: An option to enrich your skills even if you can’t afford it right now

Education loan is an option for those students who want to go for higher studies but are restrained due to financial reasons.  Recently Central government is pushing banks to promote education loan schemes. Further there is increased competition among lenders following the entry of NBFCs into this space, this made education loan easier and cheaper as compared to few years back.

An education loan not only funds our higher studies but also help save tax. Education Loan from recognised banks/NBFCs are eligible income tax benefits under Section 80E of Income Tax Act of India. The interest paid on the education loan can be claimed as deduction, as per Section 80E of the Income Tax Act of India, 1961.  

So how should one go for it?

1. Decide the Course and Institution: 

Just because we are getting loan does not mean we should take admission in any course. The decision for a course should be independent of whether it is financed by a loan or not. This decision should be based on what we want to do in future according to that the institute and course should match our future goals.

2. Determine the Amount

Once the course and institution is finalised then we need to determine the loan amount required. We need to consider other expenses also in addition to tuition fees. Like: hostel charges, mess expenses, other incidental expenses, if going abroad then visa and travelling expenses etc. also. After arriving to the total amount we need to deduct the amount our parents are going to contribute. The figure that is left with will be the loan amount required.

3. Analyse the future repaying capacity

After all this is a loan and we have to repay back from our future earnings. Hence we need to see that whether the future earnings after this course which we are doing will be sufficient enough to repay the loan. For that we need to analyse the job prospects of that course, historical placement details and the salary offered. We should consider the average salary and not the top salary offered to get a realistic income numbers. As a thumb rule our EMI should not be more than 30% of the prospective take home salary.

4. Find out the best deal

After determining the amount of loan based on our future payment capacity, we can check with various banks/NBFCs for the interest rates and other terms & conditions. Banks usually give loans at lower rates for premier institutions like IIMs and IITs as compared to other government or private institutions. Lenders also distinguish between students who get admission through the government quota and through the management quota. For foreign courses, GRE/IELTS/GMAT scores is basic criteria on which a student gets the Institution.

5. The Process

Education loans are generally unsecured loan and are cheaper than personal loans but more expensive than home loans. Generally the education loan is to be applied jointly with the parents of the students wherein the parents act as a guarantor for the loan, they can also claim the tax benefits till the student starts repaying the same. Sometime the collateral is also required based on the credit score of the parents and amount required.

6. The Moratorium

Moratorium period is one of the unique feature of education loans. Here the borrower has the option not to pay the EMI for up to 12 months after course ends or six months after he starts working, whichever is earlier. However we should remember that this moratorium is not an interest-free period. The interest keeps accruing for the period we are not paying EMIs. Hence it is always better to start repaying EMIs as soon as possible to reduce the interest burden.

7. The Repayment

Generally the education loans are for up to 10 years which could be extended upto 15 years for big ticket loans—₹7.5 lakh or more. The EMI is less for long duration loans, but the total interest payout is much higher, So one should take the loan for the period based on the repayment capacity of self. Just because we can pay for longer term does not mean to stretch is at the maximum. The interest on education loan is tax deductible under Section 80E for up to eight years, so if possible it is better to pre-pay long duration loans within eight years. We should also pre-pay the education loan if there are better investment opportunities that offer better tax adjusted return than the cost of education loan.

Finally

The education loan is a good opportunity for those who have talent but are constrained by the economic reasons. However this is a loan and we need to asses our repaying capacity based on future income. Since this could be a first loan for a student and will have great impact on his credit score, we need to be extra careful in choosing the course and institute for the same.