Today, the cost of education, especially higher education has increased immensely. If you are taking admission in a premier institution of the country or going to study abroad, then the cost of education become unaffordable for many parents. In such scenarios, considering the education loan becomes unavoidable. Before taking the education loan, taking care of certain things is important. In this post we will discuss few points which are worth considering before taking the education loan.

Eligibility Criteria

You should check the eligibility criteria before applying for the loan. This involves the things like your credit score, income, existing loans, age, etc. You should also check whether the loan is available for the particular course of the institution you have decided to join.

Loan Amount

There are many additional expanses apart from the course fee like hostel fee, cost of laptop, books, etc. The loan amount should be decided in such a way to cover all these additional expanses also. Generally, the maximum loan amount for domestic and foreign institutions is 10 lakhs and 20 lakhs respectively but the lenders may consider giving you higher loan amounts it you are taking admission in the courses of premier institutions like IITs, IIMs, etc.

Secured of Unsecured Loan

You must also decide whether you want a secured loan or unsecured loan because this decision can have a significant impact on the interest rates of the loan. Generally, education loans are available in both the variants. If you decide to take secured loan, then you must have to pledge collateral like your home or some other property against the loan amount.

Generally, the lenders do not insist on collateral or third party guarantor for the loan amount up to Rs. 4 lakhs. Even if you are taking loan from 4 lakhs to 7.5 lakhs, some lenders may waive off the requirement of collateral or third party guarantor if they are satisfied about your loan repaying capacity. For education loans above 7.5 lakhs, a collateral in the form of mutual fund, property, bank deposit, etc. is required.

Cost of Capital

This is one of the most important factor to be considered before taking the education loan. The cost of capital means how much interest you will have to pay to repay the loan. Therefore, comparing the interest rate of different financial institutions is crucial because even a slight variation in the interest rate can make a huge difference in the total cost to be paid till the final repayment of the loan. The interest rate on the education loan usually starts from around 6.75% per annum, and varies depending on the type of the course, type of the institution, past academic performance, credit score of the student/ co- applicant. The institutions charge simple interest rate during the moratorium period and compound interest rate after commencement of EMI. Some lenders also offer concession on the interest rate during moratorium period. So the borrower should carefully compare the cost of capital of different lenders and then decide the cheapest loan.

Margin Money

Some lenders require a percentage of education cost to be funded by the borrower’s own pocket. It is important to consider; how much margin money the lender is asking for. For education loan up to 4 lakhs, no margin money is required, however for loans more than 4 lakhs, it is generally 5% for Indian courses and 15% for overseas courses. Some lenders like SBI waive off the margin money it you are taking in top educational institutes.

Tenure of Loan

Loan repayment period is also an important aspect to look into. It is generally up to 8 years in case of unsecured loans and up to 10 years in case of secured loans in India for most of the lenders. Lenders usually offer a moratorium period of 1 year in addition of the course duration, during which the borrower is not required to pay the EMI. The repayment period starts after the moratorium period. It is important to note that the interest calculation starts immediately after loan disbursal and the accrued interest is added to your principle amount, which increases your repayment amount. The lender can increase the moratorium period if the borrower is unable to complete the course up to the scheduled period or planning to establish his/ her own start- up.

Exploring All Possible Scholarships Available

Before deciding the amount of loan, you must explore all the options available for providing scholarships. Many private or government institutions offer scholarships to foreign students which can substantially cut short the cost of education. You must do rigorous exercise to discover right opportunity for you as most of the scholarship programs are not well advertised, therefore you must carefully explore the direct grants offered by the respective state governments to foreign students.

Service Given by the Loan Provider

You must consider what service the lender is offering to you. The option of part payment and pre- closure of loan must be known to borrower. You must also check whether there are any additional charges for pre- closure of loan, because some lenders may have this condition also. It is also important to know whether the EMIs can be paid online or the borrower will have to physically come to bank to pay the EMIs. Knowing the availability of digital channels is very important in case the borrower is residing in foreign country. In short, the ease of repaying the loan must be a deciding factor.  

Tie- up Between the Collage and Banks/ Financial Institutions

Many colleges or universities has tie- ups with banks or other financial institutions. You must check these options before deciding from where to take education loan. The benefit to selecting these banks or financial institutions is that it can greatly reduce the loan processing time and you may also get loan at discounted interest rates.

Tax Benefits

If you are availing education loan for self, your children, spouse or children under guardianship, you are eligible for tax deductions under section 80 E of income tax act. This deduction is available on interest component and it has no upper limit. However, you can avail this benefit for only eight years from the day of commencement of EMIs. Therefore, the borrower should try to repay the loan before eight years to avail this tax benefit.

Conclusion

Due to increased cost of education, especially the higher education, considering education loan becomes unavoidable sometimes. However, you must know the above factors before taking right decision about the education loan. As this is the first loan in student’s life, so if you repay the education loan in time, your credit score will improve and your chances to get home loan or car loan in future will increase.

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