Sunday, June 5, 2011

Pay for your Education through an Education Loan

For most of us, paying for our education was something that our dad did. Oh yes, we enjoyed our college education when our parents paid the fees. Well, to be honest not all the teenagers in India are fortunate to have parents who earn enough to fund the education their kids aspire.

But, thankfully banks these days offer you Education Loans that help teenagers who aspire to study and become something that they cannot if their parents have to pay the fees...

Yes, Education Loans. They are a blessing in disguise for everyone who want to study and become something their parents could not.

What is an Educational Loan?

An Educational Loan is a loan that banks offer to students who are taking up many educational courses across the country and in some cases even abroad. The bank will pay for the college fee and a whole variety of fees that the students might incur during their studies. Eventually the student can start repaying the loan once they finish their education.

Sounds fine doesn’t it?

Unfortunately it isn’t as easy as it sounds. Lets dig deep into some details...

Do All Banks Offer Education Loans?

No. Not all banks in India offer Education Loans. And some banks have restrictions like, the students parents must have a valid bank account for atleast 6 months or the residence of the person asking the loan must be within 2 km from the bank branch and so on...

So, it is our responsibility to perform all the requisite due diligence to ensure that we know what all the bank will ask for when we go to them for the loan.

Loan Repayment:

Well, banks are businesses and are run for a profit. Though, an educational loan looks to be a noble cause, banks cannot afford to grant you the loan for free. Since you aren’t going to start repaying the loan for atleast 2 years or more for your education, the bank is investing in something that isn’t going to start repayment for quite some-time in future. So, they will be cautious and extra careful when someone asks them for an education loan.

Also, some banks give a moratorium of 6 months after your education completion to begin repayment, while some give upto 1 year and in worst case, some give you nothing. You need to start the repayment as soon as you finish your education.

So, make sure you read the repayment terms and conditions to ensure that you don’t get a shock just after finishing your studies.

Cost of Education Loans

The cost when it comes to education loans is the rate of interest you pay on the loan. Luckily the rate of interest offered is almost constant across all banks that offer these loans with probably a 0.5 to 1% difference at max. Remember that a rate of interest of 13% with no processing fee is obviously cheaper than a 12% rate of interest loan with a 2% processing fee.
So, make sure that you check out the cost of the education loan and choose a bank that offers you a good deal.

What are the Courses Eligible for Education Loans?

There are many educational courses that are eligible for an education loan. Some are:
Courses in India:
1. Graduation courses like BA, B.Com, B.Sc etc
2. Post Graduation courses like M.Sc, M.Com, PhD etc.
3. Professional Courses like Engineering, Medicine, Law, Veterinary, Management etc
4. Courses like ICWA, CA, CFA etc
Courses Abroad:
1. Post Graduation Courses like MCA, MBA, MS etc
2. Graduation courses offered by reputed universities

Please note that, this is not an exhaustive list. It is just an indicative list that shows you the kind of courses that can be used to get an education loan.

Amount of Money you can Get

For most banks, the amount of money you can get as an educational loan varies between 7.5 lakhs and 15 lakhs for study within India (Private Banks offer a higher amount but at a higher interest rate)

The amount is between 15 to 20 lakhs for study abroad. (Again private banks offer a higher amount but only at a higher interest rate)

What is the Repayment Period for the Loan?

The repayment period is between 5 to 7 years and it depends from bank to bank. You can even choose to repay the loan earlier than the scheduled duration if you want.

Are there any Tax Benefits?

Repayments for Educational Loans are eligible for tax rebate under the section 80E of the Indian Income Tax Laws for the entire interest amount paid towards the education loan.

Remember to get an interest paid statement from your bank and use it when you file your tax returns to get the tax benefits.

What are the Documents Required for an Education Loan?

To be honest, the list below is only indicative and not exhaustive. The documents required may change from bank to bank.

1. Mark sheets of your last qualifying exam
2. Proof of admission into the college
3. Schedule of expenses for the course
4. Photographs (Usually passport size)
5. Bank Account Statement of the Borrower for the last six months (If Applicable)
6. Income tax Assessment statement of the guardian (Parents or Guardians)
7. Statement of Assets & Liabilities of the co-borrower (Parents or Guardians)
8. Proof of Income of the Guardian
9. Identity Proof like Driving License, Passport or Voters ID for both the student and the Guardian
10. Address Proof like Ration Card or Electricity Bill etc

I repeat, the list above is not exhaustive but it covers most of the documents that may be required to get an education loan.

Important Do’s and Don’ts for Education Loans

Getting an education loan is a long term commitment and requires a lot of thought before you apply for one. Since it’s a long term financial commitment, certain things are important and you need to remember them. They are:

1. Do thorough research while applying for an education loan
2. See if your requirements match with the requirements of the bank
3. Read all documents carefully, NEVER ASSUME ANYTHING
4. Try to understand all the terms and conditions properly
5. Don’t involve any middle agents or brokers. It is better to deal with the bank directly
6. Preferably opt for a bank that is near your home where you or your parents have a bank account for a few years and have a good reputation
7. Make sure you submit all the relevant documents
8. Do not forge any documents in an attempt to fast-track your case
9. Do not attempt to bribe anyone
10. Make sure you follow-up with bank officials regularly

Happy Studying!!!

6 comments:

  1. Hi Anand,

    I have invested 1 lakh in ELSS, with three years lock-in, and 20K in Infra bonds to avail tax benefit. However, I also have an education loan. Could I get further benefit under section 80E for the repayment of interest although I am already enjoying tax benefit on 1.2 lakhs as mentioned above.

    ReplyDelete
  2. @ Anonymous

    Tax benefits on repayment of Education Loan is under Section 80E and is not related to benefits under Section 80C(1lakh) or Section 80CCF(Infra bonds 20 thousand)

    So, you can comfortably avail tax benefits under sec 80e for the interest repaid on your education loan.

    Anand

    ReplyDelete
  3. hi anand vijay ji i need to few loan because i am study of mba program can u give us more details of higher management program loan....

    ReplyDelete
    Replies
    1. Hi Nikhil - All educational loans are the same. You need to consult with any major bank in your nearby locality to get more details. Each bank has its own flavor of educational loan and you can compare a few and choose one.

      Best wishes
      Anand

      Delete
  4. Hey Anand! I remember seeing an article/comment in your blog where one invests for 10 years in a secure long term scheme as soon as a child is born, and that'll take care of all education expenses thereafter. Could you please direct me there. I'm unable to find it through search. Thanks!

    ReplyDelete
    Replies
    1. Karthik - I remember this article about planning for your childs future - check it out: http://anandvijayakumar.blogspot.sg/2013/10/how-to-plan-your-childs-financial.html

      Alternately, if your child is a girl baby you can also consider the sukanya samriddhi scheme as outlined in my book on safe investments. Check it out here: http://anandvijayakumar.blogspot.sg/p/books-by-this-blog-author.html

      I dont remember recommending any financial products (or ULIPs) about this subject.

      Thanks
      Anand

      Delete

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