A Comprehensive Guide On Education Loans In India
The education industry is never hit by recession. The number of Indians opting for higher education is growing every year. With the increase in the cost of education, Indians are finding it difficult to afford higher education. The RBI has included education loans as part of the priority sector lending of banks. It aims to provide need-based finance to a meritorious student for taking up higher education.
Amount and Rate of Interest
Every bank decides the amount of loan as per applicant’s details. These loans often cover fees for tuition, examination, library, laboratory, accommodation, money for purchasing books, equipment, instruments, travel expenses for studies abroad, etc. In some cases, there are limits on some of these items. The loan also pays for expenses on study tours and project work. Some of the banks don’t have an upper limit on the amount of loan.
The rate of interest can range from 9% to 16 % depending on the courses. The banks decide the loan amount and the rate of interest based on employability and consequent ability to repay the loan. Some Banks prepare and publish a list of eligible courses they consider for sanctioning of student loans. Details such as the percentage of final year students getting a job offer through campus placement, average salary offers etc. are collected for each institute for evaluation of employability of students. Often students from the premiere institutes get offered a preferential rate of interest. Banks also monitor the academic progress of the student. Generally, college authorities will provide progress report after every semester /year.
A co-applicant has to be selected for education loans taken for full-time courses. Co-applicants can include siblings, spouse, parents or other family members. In case of non-repayment, the student’s own credit history, as well as his co-applicant’s history, gets affected.
No security has to be submitted for education loans taken up to Rs. 4 lakhs. Third party guarantee has to be furnished for loans between Rs. 4 lakhs and Rs. 7.5 lakhs and tangible collateral security is required for loans above Rs. 7.5 lakhs.
1. Admission Proof
2. Tuition fee details
3. KYC documents of the student
4. Academic records
5. Co-applicant details and financials
6. Collateral Security, if required
Most of the banks grant loans in Indian currency and expect the repayment in the same currency. Generally, the repayment starts when the course is completed. Some banks even provide a relaxation period of 6 months after securing a job or a year after the completion of studies for repayment. The repayment period is generally between 5 and 7 years but can be extended beyond in certain cases.
Multiple ways to payback:
1. Equated Monthly Instalments (EMI) – Till your payback tenure gets over.
2. Prepayment – You can pay some amount in between as part payment, which would get deducted from your principal amount.
3. Full payment – You can, at any point of time after completion of the course or before, pay back the whole amount. As per RBI regulations, there would be no charge for full payment closures.
The interest paid on education loan is allowed as a deduction from the total income under section 80E. However, the deduction is provided only for interest part of the EMI. There is no tax benefit for the principal part of the EMI. Only an individual can claim this deduction. For example, parents can claim the benefit for the higher education of their children. The deduction allowed is the total interest part of the EMI paid during the financial year. There is no limit on the maximum amount that is allowed as deduction. The deduction for the interest on loan starts from the year in which you start repaying the loan. It is available only for 8 years starting from the year in which you start repaying the loan or until the interest is fully repaid whichever is earlier. It means if entire payments are done in 5 years only, then tax deduction will be allowed for 5 years and not 8 years. If your loan tenure exceeds 8 years, then you cannot claim a deduction for the interest paid beyond 8 years.
Every bank has its own policies and it is advisable to read all the terms and conditions of the loan application form because there might be some hidden costs as well.