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A Guide To Education Loans

A full and fruitful life necessitates a high-quality education. It becomes the foundation of whatever you make of your life, but quality education is expensive and the costs are increasing every year.

In reality, the price of attending a reputable university is already very high. An MBA that cost 13 lakhs a decade ago, would now cost almost double that.

Parents who plan their child’s education in advance and want to provide them with the best opportunities possible, invest their money in mutual funds (MFs), fixed deposits (FDs), and unit-linked insurance policies (ULIPs).

Amid all this, there still is a possibility of a financial shortfall. In such a situation, an education loan plays a critical role in bridging the gap between the shortfall and the necessary amount.

The Rising Cost of Education

According to Forbes, education costs are rising at double the rate of inflation. In 15 years, the cost of an MBA is expected to rise from Rs 2.5 lakh to Rs 20 lakh.

So, if a couple saves Rs 2,500 per month for 15 years at a rate of 12%, they would have saved about Rs 12.5 lakhs, ultimately needing some more funds if their child decides to pursue an MBA.

Now, you must have some questions on your mind regarding the intricacies of availing an education loan. We have tried to answer a few commonly asked questions to enhance your understanding.

1. Who can apply for a student loan?

The primary creditor is a student. A co-applicant may be a parent, partner, or sibling.

2. What is covered by a student loan?

It includes the basic course fee and other costs such as accommodation, exam fee, equipment, and other miscellaneous expenses.

3. Who can avail a student loan?

It is available to students who wish to study in India or further their education outside the country. The overall sum available for studies in India and abroad differs from one bank to the next.

4. For what courses can the loan be availed?

It is available as a full-time, part-time, or vocational course leading to graduation or post-graduation in engineering, management, medicine, hotel management, architecture, and other fields.

5. What are the eligibility criteria and documentation requirements?

To be eligible for the loan, one must be an Indian citizen who has been accepted into a college or university that is recognised by a competent authority in India or abroad. The applicant must have completed his senior high school education.

Some banks can provide a loan even before a student has been accepted to a university.

The Reserve Bank of India (RBI) guidelines state that there are no upper age limits, but some banks may impose them.

Additional documents such as the institution’s admission letter, fee structure, and Class X, XII, and graduation (if applicable) mark sheets are required by the banks. The co-applicant’s income records, such as salary slips or income-tax returns (ITR), are also needed.

6. Is collateral required for financing the loan?

Depending on the amount, banks will fund up to 100% of the loan. There is currently no margin money required for loans up to Rs 4 lakh. To study in India, the applicant must contribute 5% of the necessary funds. The needed margin money for international studies, on the other hand, rises to 15%.

Banks may also need collateral for loans exceeding Rs 7.5 lakh. For loans up to Rs 4 lakh, financial institutions currently do not need any collateral or third-party guarantee.

A third-party guarantee is required for loans between Rs 4 lakh and Rs 7.5 lakh. For loans exceeding Rs 7.5 lakh, a security deposit is required. According to the fee structure, when a loan application is approved, the banks send the funds directly to the college or university.

7. What is the rate of interest charged on the education loan?

To set an interest rate, banks use the Marginal Cost of Funds based Lending Rate (MCLR) which in India ranges anywhere from 7% – 8% plus a spread (about 1 – 2.5%). The additional distribution is currently in the 1.35 – 3 per cent range (as of 2017).

8. What is the process of repayment?

The individual availing the loan for their education is responsible for repaying the loan. In most cases, repayment begins when the course is completed. Some banks also give you a six-month grace period after you get a job or a year after you finish your studies before you have to pay back your loan.

The repayment period is usually between 5 and 7 years, but it may also be extended.

The bank charges a basic interest rate on a loan over the repayment period. The student’s equated monthly instalment (EMI) burden for future repayments is reduced by paying basic interest during the course duration.

9. What precautions should one take while applying for student loans?

When availing a loan, one must consider bank fees such as transaction fees, pre-payment fees, late EMI payment fees, and so on. The majority of lenders charge a processing fee of 0.15 per cent of the total loan amount.

10. Are there any tax benefits?

The interest paid on the repayment is deductible under Section 80E of the Internal Revenue Code. This tax benefit is only available to people who are paying interest on a personal loan.

The whole amount of interest charged is deductible from your taxable profits. This deduction can be taken for up to 8 years. There are no tax deductions available for the principal sum.

11. How can I apply for an education loan?

You can visit the Education Loans page on the EduFund website and fill up a simple form. You will get all the details, along with guidance from experts in the field.

Conclusion

Good education is extremely important in the present dynamic world. It not only boosts self-confidence in students but also equips them with skills which in turn help them lead their life in the best possible way.

Taking a loan might look frightening but in the long run, it definitely pays off, provided the student is focussed and makes the best of the opportunity.

Also, since an education loan is a person’s first loan, it aids in the creation of a good credit score. If you repay the loan on time and without defaults, it would be easier for you to obtain a home loan, car loan, or any type of loan in the future.

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