A dummy's guide to all you must know about before availing an education loan
As the educational expenses are soaring, education loans have become very common means of financing higher education. Most students expect to earn high salaries at the end of their professional training and are likely to be in a position to repay these loans over a period of time.
Both public sector and private sector banks offer education loans. State Bank of India is the pioneer in the education loan segment. It started offering education loans from 1995 and thereafter many banks followed in its footsteps.
Today education loans are provided for both graduate and postgraduate courses including engineering, medical, architecture, management, law, agriculture, veterinary, dental, computer etc. Banks usually have their own list of courses and they sanction loans only for these courses.
Eligibility
Before sanctioning the loan, banks look for the viability of the borrower by having personal discussions with the student, family's assets and annual income, the type of the course and reputation of the institute.
In most banks for loans up to Rs 4 lakh no collateral or margin is required and the interest rate will not exceed the prime lending rates (PLR). For loans above Rs 4 lakh the interest rate will be PLR plus 1 percent.
Security to the loan depends on the amount. Security is some form of investment (i.e bank deposits, house property etc) that are parked with bank while taking the loan. Security is not needed for loan amounts up to Rs 4 lakh. Instead of security, some bank may ask for a third party guarantee ( guarantor) for higher loan amounts.
PNB has laid down a set of eligibility criteria for sanctioning the education loans.
- A student, who is an Indian national can apply for the loan
- An applicant is considered eligible for PNB educational loan, if s/he gets admitted to a professional or vocational course through a selection process or into a foreign institute
- A student applying for a graduate programme can also get the loan if s/he obtains at least pass marks in the qualifying exam.
The required documents that would be submitted while applying for education loan may vary from bank to bank. Some of them include proof of admission, fee structure of the institute, mark list of the qualifying examination and photographs.
If the applicant is earning the documents such as income tax assessment order of last two years, bank account statement, income proof etc are needed.
Tax advantage
There is a tax advantage to take education loans. Interest repayments on education loans are tax deductible. A deduction under section 80E of the Income Tax Act for the interest paid on an educational loan can be claimed. This deduction is allowed for 7 years and the loan must be taken for higher education purposes only and loan has to be from a financial institution or a government approved charitable institution.
Parameters to look for while going for an education loan
Repayment options
Unlike any other loan, education loan provides the option of a moratorium period or a 'repayment holiday', which means, the borrower is given a leeway to repay the loan after the education course for which the loan was taken is completed.
An education loan typically has three repayment options:
- Education loan with repayment holiday. Many banks stipulate repayment within one year after completing the course or six months after getting a job, which ever is earlier
- Interest alone is paid during the period of course. After the course completion, you start paying the actual EMI (principal and interest)
- You start repaying the loan through EMI immediately after loan disbursement, in which case you could get the loan at an interest rate lower by about 1 per cent.
The repayment conditions vary from bank to bank. Therefore, discuss this with as many banks as possible to get the repayment option according to your requirements
Fixed or floating rate?
Some banks offer a fixed interest rate while others offer a floating interest rate on education loan. If the difference between fixed and floating rate is only about 1 per cent, it is better to opt for fixed rate as these have shorter repayment tenures of 5-7 years.
Many banks do not offer genuine fixed interest rate where the interest rate remains fixed for the full tenure of the loan. They, typically offer a fixed rate loan with a reset clause. This means the bank can revise interest rate whenever it feels like doing it. So ensure that you take a genuine fixed rate loan. If it is a fixed rate with reset clause, a floating rate may be a better option.
Finally it depends upon your risk appetite whether to opt for a fixed or a floating rate loan. If you are completely risk averse, you should go for a genuine fixed rate education loan. However, if you strongly feel that interest rate will go down and are willing to take risk, you can opt for a variable rate loan.
Processing fee
Most banks do not charge a processing fee for education loan. Therefore if your bank asks for a processing fee you can request them to waive it off.
Prepayment fee
Again, in almost all cases, banks allow foreclosure or prepayment of the education loan without charging a penalty if the borrower makes the payment from her/his own sources.
Special schemes
Many banks, especially government-owned, have special schemes for girl students. Some banks offer 1 per cent lower interest rate for girl students. So check with your bank about all special schemes.
Illustration: Uttam Ghosh/Rediff.com
