Planning to Take an Education Loan? Here Are a Few Tips
Table of Contents
Choosing Your Course
If you're thinking about taking an education loan, make sure to choose a course that truly interests you, not just what’s trending. Picking a field you're passionate about will help you succeed in the long run.
Do your research on the course content, career opportunities, and whether you’ll be able to repay the loan after completing your studies. Choose wisely for a fulfilling career and to make repaying the loan easier.
Choosing Your Institution
Research about the institution is of great importance when applying for a course. Some universities may have a good name, but may not have a good placement strategy. When applying for courses abroad, the right institution would make a big difference.
Recent headlines have been about students being deported and denied access to fly to America. The top most reason for this was because the university they selected was under investigation or blacklisted.
Choosing a university that has been blacklisted will most definitely mean you have wasted your time and a lot of money. These universities are under investigation because they accept students without academic credentials to make money from the high fees they charge.
Choosing to Apply on Your Own or Through an Overseas Consultancy
When you choose to apply on your own, there are a lot of procedures to be completed. You will also need to do extensive research and apply to colleges when seeking a loan, you will have to approach the bank by yourself and find out what you are eligible for.
If you choose to go through a consultancy, they will take care of a lot of the details for you and help you with the process. But whichever option you choose, be sure to educate yourself on the country's laws and requirements.
Also be sure to be knowledgeable on your college, course, loan and placement and so on. A good student will research every detail including how could the professors are.
Choosing Your Bank
A number of banks offer educational loans for different courses in India and abroad. Choose a bank that will provide you with the best moratorium period, interest rate and terms to pay back the loan. Also, make sure you have the option of repaying the loan early.
It is advisable to select a bank that offers you the best loan terms rather than the most finance. Also, check if you are allowed to pay Equated Monthly Instalments (EMIs) in advance or make part payments towards the loan.
Learn about all the service charges that are applicable on your loan. Prepayments and part payments might carry a penalty.
Know Your Stuff
Whether you are planning to study in India or abroad, you should know the details of your further studies and the loan you have taken. If you are entering a foreign country, a VISA makes you eligible to enter but it is not a guarantee of unrestricted access.
You could face interviews at the airport about your purpose and details of entering. You should be prepared to answer all questions relating to your course, institutions, professors, cost of the course, loan amount, repayment schedule, interest rates, and so on.
You should also be aware of your personal details and your family details that include the date of births, addresses, educational qualifications, employment and so on.
Total Cost Over EMI
Some people opt to take a loan for a longer duration because the EMI will be lesser. But in this situation, the cost of the loan and the interest paid will be much higher. For example, Rs.10 lakh taken for five years at 9% interest p.a. will result in an EMI of Rs.20,758 and the total cost of the loan will be Rs.12,45,501.
The same loan taken for ten years will have an Equated Monthly Instalment (EMI) of Rs.12,668, but the total cost of the loan will be Rs.15,20,10.
You will pay Rs.2,74,608 more for the extended tenure. So, if you have good prospects of a well-paying job after the course, you can opt for a shorter loan tenure. Though your EMI is higher, your loan will be cheaper and you will also repay it faster.
Pay Before You Have To
Moratorium periods are holiday periods that are usually the duration of the course, plus one year after the course, or six months after being employed.
During this period, you do not have to make payments on your loan, but interest will accumulate throughout this period. You are allowed to pay off the interest during the moratorium period which will lessen the burden of the loan as well as make the loan cost less when you finally have to start paying your EMIs.
Take the Loan in Instalments
Banks charge interest on the amount of money disbursed. Usually, you are required to pay for the course each semester or each year. So, it would be smarter to take the loan as and when required.
This way the interest accumulated will be much lesser. Rather than the amount being sanctioned in one lump sum, make sure the amount is disbursed as and when required.
Have a Plan for Repayment
Budgeting will be important when you have a loan in your name or your parent’s name. Once you start earning, you need to strategize to pay back the loan. You should be prepared to cut costs on unimportant things and focus on repaying the loan as quickly as you can.
Loans can become heavy to manage over time, so it's better to pay them off sooner rather than later. Use extra cash or bonuses to make part payments on the loan. You will save on a lot of interest.
Tax Benefits
You can avail of tax benefits under Section 80E of the Income Tax Act on the interest you pay on your educational loan. To be eligible for this deduction, your loan should be taken from an Indian scheduled bank or a government-recognized financial institution.
The deductions are available only for the initial assessment years and seven years after, or till you pay off all the interest, whichever is earlier. So, the maximum tax deduction period is eight years. Opting for a longer loan therefore means that you will get the tax benefit only for the first eight years.
Defaults and Extensions
If you are unable to land a job due to macroeconomic reasons that are genuine, banks may be understanding. Though they may be difficult to convince, if it is a true and exceptional situation, banks may extend your repayment or moratorium period.
For any other event beyond your control that renders you unable to complete your course on time, the banks may also extend your repayment tenure. You should understand that this is only in truly exceptional cases where banks might consider different options.
But never default on paying your educational loan. If your parents are co-borrowers, it will hamper future credit opportunities for them and yourself. If you have offered collateral, that will also be at stake if you are unable to repay the loan. So, before you take a loan, research and proper planning are required to ensure that you can pay it back.
Finally, if you are planning to study further, have a clear plan in mind but with room to adapt. Before taking a loan to fund your education, you should know the implications of it. Be prepared for the best and the worst. This will help you manage your educational loan and pay it off without much burden.
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FAQs on Planning to Take an Education Loan
- How long does it take for a bank to communicate its decision?
A bank will provide its decision in about 15 working days from the date of receiving the application for the education loan, provided that the application is complete in all respects. This may vary from bank to bank.
- Can banks provide education loans in foreign currency if the applicant needs to pay my study expenses in dollars but the bank is located in India?
The loan amount disbursed by the bank is typically paid directly to the educational institution in the local currency (such as Dollars, Pounds, Euros, etc.). The bank may charge an additional currency conversion fee by RBI regulations for the disbursed loan amount.
- Are there any charges for prepaying an education loan?
Most banks do not impose a prepayment penalty on education loans. However, confirming with the bank before finalizing the loan agreement is advisable.
- Which courses are eligible for an education loan?
Education loans can be availed for all courses recognized by the UGC in India and for regular courses abroad. Each lender has a different list of educational institutions and courses that they provide loans for, both within India and overseas.
- Is a co-applicant required for an education loan?
Yes, for all full-time courses, a co-applicant is required. The co-applicant can be a parent, guardian or a spouse (if married).
- What is an average tenure of an education loan?
The average tenure for an education loan is usually between 5 years to 7 years, with most lenders. However, some lenders may offer longer terms of up to 15 years for higher loan amounts.
- What is the maximum loan amount available for overseas studies?
Banks generally finance up to 90% of the education expenses as a loan, and some even provide loans for 100% of the education expense. However, the exact amount eligibility depends on the applicant's academic record, the parent or guardian's monthly income, collateral's value, etc.
- How is the loan amount disbursed to the borrower, institute, college, or university?
The loan disbursement process involves directly paying the tuition and hostel fees to the institute based on their schedule and fee structure, typically through a draft. Additionally, other components of the loan, such as expenses for uniform, lab equipment, laptop computer, travel, etc., can also be claimed.
- What does employment verification mean in the context of an education loan?
Employment verification in an education loan refers to the process wherein certain banks independently verify the employment records of the loan co-signer, who is usually the parent, guardian or spouse of the student seeking the loan. This verification is conducted to ensure the accuracy and validity of the provided employment details.
- Do education loans provide any Income Tax benefits?
Loan borrowers can avail of tax benefits on the interest paid on education loans under Section 80E of the Income Tax Act. This benefit is available in addition to the Rs.1,50,000 deductions allowed under Section 80C.
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