Quality education is an indispensable part of a complete and successful life. The cost of education is rising rapidly. As can be seen from studies, it is increasing at an average rate of 15% per annum. Considering this, parents are required to save a lot of money to provide their children with the opportunity to get quality education. But despite their efforts, they may face a financial crunch. In such a situation, an education loan is your best bet to meet the costs of an expensive educational program.
What is an education loan?
Education loan is availed to finance all your education related expenses. They are given for the purpose of pursuing an academic degree in India or abroad and are provided by almost all banks and NBFCs (Non-Banking Financial Companies). An education loan covers course fees and other associated expenses like hostel and mess charges, books and supplies, exam and other miscellaneous expenditures.
The reasons why education loan is better than conventional self financing are:
Today, there are a large number of banks and Non-Banking Financial Companies (NBFCs) that offer an education loan to students. Applying for an education loan has become pretty simple. To be eligible for an education loan various lenders consider different factors, such as the student’s past academic record, reputation and quality of the university/institute in which he/she is taking admission and the ability to get a job on completion of his/her course. Some lenders offer doorstep services if the university/college where you are taking admission is a top tier institute or the student has been a brilliant student all through his/her academic life.
Collateral-free education loan
There are two types of education loans – secured and unsecured. A secured education loan is one against which you provide a security or collateral and in an unsecured education loan there is no need to provide any security. Usually, upto Rs. 4 lacs for an education loan, no collateral is required but when the loan amount exceeds Rs. 4 lacs, borrowers are required to provide collateral/security and a third party guarantee to secure the loan.
In very rare cases, when the student is extraordinary or highly meritorious and has secured admission in one of the Ivy League colleges in India or abroad, banks & NBFCs provide a larger quantum of education loan without any collateral. However, there are some banks and NBFCs in India that provide education loans without collateral in normal course as well.
Tax benefits under section 80E
You are entitled to claim tax deduction for the repayment of interest on education loan in compliance with Section 80E of the Income Tax Act. You can avail tax benefits once you start repaying your education loan. Students are supposed to submit interest certificate as proof to claim tax benefits. Interest certificate is a certificate received from your bank which shows the amount of interest paid by you to the bank in a financial year with respect to your ongoing loan. Remember the tax benefits can be availed for a period of 8 years, thus if your loan continues after this period, no tax benefits will be granted.
Adequate repayment tenure
Most education loans have a long enough tenure ranging from 5 to 7 years because it is difficult for students to start repaying their loan in large amounts when they are just starting to earn. Banks and NBFCs calculate tenure differently. For banks tenure starts after completion of moratorium period i.e. if the student is pursuing a 4 year course and the bank offers a 6 month additional moratorium, it will start to calculate tenure after 4.5 years of disbursement. All this while banks will calculate and accumulate simple interest in the loan account. Once the moratorium period of 4.5 years is over, the bank expects the student to start earning and repay the loan. While calculating his EMI amount the bank will consider the accumulated simple interest as well. NBFCs on the other hand calculate tenure from the date of disbursement. They also charge simple interest for the course duration but expect that a minimal monthly payout of this interest is done every month even during the course duration.
Interest rates and processing fees
Interest rate is an important factor to decide whether to opt for a loan or not. By and large, education loans are issued at much lower interest rates than personal loans. Therefore, availing an education loan makes sense instead of self funding it or taking a personal loan to finance your education. Moreover, the processing fee applicable on education loans is much lower than that applicable on personal loans.
Deferment of repayment
Generally, repayment of education loan starts on completion of the course and the underlying period between disbursement and start of repayment is called as the moratorium period. Whereas the repayment in other loans starts as soon as they are disbursed. Normally a moratorium period is provided in case of an education loan. Moratorium period is offered by institutions so that the students are able to find a job and start working before they start repaying the loan. During the moratorium period, the bank calculates interest using simple interest. Some lenders offer discounted rate of interest if the students or their parents pay EMIs during the moratorium period.
You are not required to sell family assets
As a family, you need not sell off assets like gold or property to fund your child’s education. Investments are done from a long term perspective and liquidating them after only a few years severely reduces your chances of creating wealth in the long run. Hence, by getting an education loan, you can ease off the burden on your parents’ shoulders all the while keeping their investments safe.
To preserve dignity
Borrowing from relatives and friends sounds a good idea, but it can jeopardize personal relations if you fail to repay or delay the repayment. Also, if you borrow from somebody, s/he will expect you to pay back a lump sum amount rather than installments. This may add to stress during the early years of your career.
Financial pressure should not hold back students from accessing quality education. With a great number of options from banks and NBFCs, you can help yourself or your child in realizing their dream.