Checklist for education loans

For loans over Rs 4 lakh and up to Rs 7.5 lakh, a suitable third party guarantee is all that is required.

BL : Maulik Tewari ;June 1, 2013

Interest rates vary across banks, so survey many institutions before you zero in on one.

It’s that time of the year when students gear up for admissions to colleges and universities. Getting a seat at an institution of your choice may be the first priority, but being able to fund that education is equally important. Education loans are an option you canconsider.

WHAT’S ON OFFER

Banks offer loans for many graduate, postgraduate and other professional courses run by recognised institutions in India and abroad. Most banks lend a maximum of Rs 10 lakh and Rs 20 lakh for studies in India and abroad, respectively.

Some offer larger amounts too. For example, Indian Overseas Bank gives Rs 15 lakh for education inside the country and Rs 25 lakh for foreign education. State Bank of India can loan up to Rs 30 lakh for education abroad.

Since interest rates vary across banks, survey around to get the best deal possible. At present, the interest rates are in the range of about 11 per cent to 14 per cent. But remember that these loans are offered on a floating rate basis. So you need to be prepared for the risk of higher interest rates in future. But, you also stand to benefit if the base rate is revised downwards.

There are few ways in which your interest burden could be lower. If you have happen to make it to one of the country’s premier institutes including the IITs and the IIMs, then do check whether banks offer any loan scheme for students of these institutions.

The advantages could be many – relatively lower interest costs, higher loan amount and easier or no collateral requirements. SBI’s ‘Scholar Loans’ and Bank of India’s ‘Star Vidya Loan’ are two such schemes. Also, some banks offer a 0.5 per cent to 1 per cent concession in interest rates to girl students.

Those belonging to an economically weaker section i.e. those with an annual family income (from all sources) of up to Rs 4.5 lakh – can also hope for some relief. Such students can avail full interest subsidy during the moratorium (holiday) period.

However, they will have to bear the interest costs post this period. The scheme is applicable only for studies in India.

MARGIN MONEY

If you are borrowing up to Rs 4 lakh, you do not have to bother about margin money. But, if your loan exceeds this amount then you have to satisfy the bank that you are capable of meeting a part of the cost yourself. Generally, margin for loans for studies in India and abroad is 5 per cent and 15 per cent, respectively.

The good thing is that scholarship money, if any, will be considered a part of the margin money.

For loans over Rs 4 lakh and up to Rs 7.5 lakh, a suitable third party guarantee is all that is required. But you need to arrange for suitable collateral if your loan amount exceeds Rs 7.5 lakh. This could be an immovable property, fixed deposit, NSC or an LIC policy, among other things. A student taking a foreign education loan has yet another thing to take note of. A loan is sanctioned by a bank in rupees. At the time of disbursement, the bank will dispatch an equivalent amount in foreign currency (based on the existing exchange rate). If the rupee is relatively weaker then, the student will receive a lower amount. So, a student has to be prepared to bear this foreign exchange risk.

REPAYMENT

For education loans, banks allow a moratorium (holiday) – the period during which you do not have to start repaying the loan. This is taken as the course period plus one year or six months after getting a job, whichever is earlier. It is after this period that the EMIs begin.

It, however, makes sense to start paying/servicing the interest during the holiday period itself, if possible. If you do so, your EMIs will be lower. If you decide to service interest after the holiday period then you land up paying higher EMIs as they will be calculated based on a higher amount (principal + accumulated unpaid interest during the holiday period). Second, many banks offer a one per cent concession in interest rate during the moratorium period or even for the full tenure of the loan, if complete interest is serviced during the moratorium period.

Additionally, you can also claim the interest paid on an education loan as deduction in arriving at your taxable income. But, you must sure that the loan has been taken from an approved financial institution to be eligible to claim this benefit.

maulik.tewari@thehindu.co.in

s