A college loan covers cost of tuition, living costs and insurance, flight costs, and other incidentals. Given the wide variety of choices available today, by putting in some effort, it is possible to find the best deal for your needs. Taking an education loan is also a smart move as you don’t need to break your savings and you get hefty tax benefits.
Who should take a loan and why
All students pursuing higher education should take a loan for funding their education. This includes people who already have sufficient funds, i.e. those who have either saved substantially or have considerable backing from family or guardians because, Indian taxation laws allow for a favorable benefit of tax deduction for the repayment of the loans. A total of up to Rs 40,000 is allowed as annual deduction from taxable income under Sec 80E of the IT Act.
Students pursuing full time higher education, in graduate, or post graduate studies, professional education, pure and applied science courses are allowed to claim this deduction. This includes students pursuing overseas education. Most lenders require that students show proof of admission to the graduate or PG program; however, there are some institutions like CREDILA who allow you to secure a loan before securing admission. There are no minimum or maximum age restrictions, although students are usually above 16 years of age or have completed at least the 10th or 12th grade.
How much loan can you get & when and how do you repay?
Students going abroad can get a loan for up to Rs 20 lakhs from banks and Rs 25-30 lakhs from financial institutions like CREDILA. There are slight variations in regard to application process, documentation, interest rates, guarantees etc. Loan repayments begin one year after the end of your course or six months after you secure your first job, whichever is earlier. Most lenders also allow for additional time for course completion in case the student is not able to finish the course on schedule. Loan repayments are spread over 5-7 years, and include options for closing early.
Interest, margin money, guarantors & collateral
- As with all loans, borrowers need to repay the principal (actual amount borrowed) with interest, which is a price you pay for usage of the loan facility. This is a floating percentage, which may be revised as per RBI guidelines and at the lender’s own discretion. For educational loans, the interest rates are in the range of 11-14% for most Nationalised banks and financial institutions. Girls generally get a 0.5% concession. Click here, to see a quick summary.
- There is also the all important factor of “margin money”! What this means is that most lenders will not loan you the entire cost of education – they also expect you to pay part of it. In other words if, for example, your education costs are Rs. 10 lakh in all, and there is a margin of 15%, then, the bank will lend you Rs. 8.5 lakh, and you will have to put up the remaining Rs 1.5 lakhs. The idea is to ensure that the loan seeker has the ability to bring money in and demonstrates responsibility in doing so. This gives some assurance that the borrower will make sure that it is used wisely. Not all lending institutions insist on the margin money, for example, loans taken from HDFC’s dedicated educational loan provider CREDILA, does not need a margin.
- A guarantor is a third party (different from the applicant), who agrees to undertake responsibility for the repayment of the loan in case the original borrower is unable to repay it. Besides this undertaking, lenders generally also ask for collateral in the form of fixed deposit receipts, residential or other property deeds, or other security, which is then kept in the lender’s possession until the loan is repaid. This is done to safeguard the bank or lender against a bad debt. The lender may waive the guarantee if the borrower’s previous repayment track record or financial history is very sound. Typically, loans up to Rs 4 lakh need neither collaterals nor margin money. Besides, students securing a scholarship could have the margin waived on account of the scholarship grant.
- If payments are defaulted on i.e. not made on time or, there are provisions for penalties/late payment fees in the loan contract. Besides, defaulters also stand the risk of being ‘black listed’ which severely limits their future credit options. However, most bankers or institutions are receptive to negotiation and, in case there are genuine difficulties, do allow for extensions on payment tenure, or reduction of EMI’s.
So, look around and see what your options are – a good loan deal can be a big asset in helping you achieve your dream of an American education.