Understanding Education Loans

Education is expensive and Higher education is all the more expensive especially foreign education. Hence the need for education loan, which is a  financial aid given to meritorious but needy students for meeting the expenses of their higher education in India or abroad. In this article we shall explain education loan, what it is, process of getting education loan, repayment, tax benefits under section 80E.

How expensive is higher education?

Education has become very expensive and Higher education is all the more expensive . Our article Rising Education costs ! covers survey which shows school education for a child in 2011 costed Rs. 94,000 annually for single child. Example of fees of higher education is given below .

What is education loan?

Educational loans are available for the purpose of higher education. Higher education means any course of study pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognised by the Central Government or State Government or local authority or by any other authority authorised by the Central Government or State Government or local authority to do so.

·         The course should necessarily be full time.

·         It can be graduate or post-graduate course in technology, engineering, architecture, medicine, management and applied or pure sciences, including mathematics and statistics etc.

·                  It can be pursued in India or abroad.

·               One gets tax deduction for education loan taken.

Who gives out education loans?

Most of the financial institutions and banks give out educational loans. As the Reserve Bank of India (RBI) has included education loans as part of the priority sector lending of banks, the public sector banks are at the forefront of such loans.

What is covered under the loan?

Education loans take care of all expenses incurred such as :

·         Admission, tuition, examination and library fees

·         Cost of purchasing books, computers and other equipment.

·         Some banks like State Bank of India also offers loan for two-wheeler if hostel and college are far.

If the loan is being taken for studies overseas, travel expense is also included in the loan amount. As medical expenses are high in countries such as the US, the loan also accounts for health insurance. Although the bank is in India, the student gets his amount in dollars for studies overseas, and the amount is paid directly to the institution abroad. The banks charge students a fee for this service, strictly as per RBI norms.

What is eligibility criteria for an educational loan ?

Eligibility criteria varies from bank to bank. Some common criteria are:

·         The institution must be recognized

·         Confirmed Admission Letter from college or institute

·         Age of the student must be 16-26 (for some banks 16-35 years)

·         Student should have good academic record

·         Regular income of parent/co-applicant

What is the maximum amount lent by the bank?

Under the education loan scheme, one can avail of a loan up to Rs 10 lakh for studies in India and Rs 20 lakh for studies abroad.

What is the interest applicable on Educational loans?

The interest rates vary from bank to bank and depends on the amount of the loan taken.

Education loans are usually on floating rates where the interest rates may change. Some banks such as Bank of Baroda, offer a fixed rate of interest, which is usually 2-2.5% above the bank’s base rate. Special concessions on interest rates of 0.5/1 percent are available for women students.Typically, interest rates on educational loans range between 9% to 14%. Rate may vary depending on the course, college/institute and university. Banks usually offer concessions to students who have secured admission to premier institutions. For instance, if someone joins an IIT or IIM, one’s loan might be cheaper by half a percentage point.

One can compare the rates at Deals4loans compare educational loans , RupeeTalk Education Loan. Verify it with the bank. (Note: We have no affiliation with any of the sites mentioned here, We are not recommending them. It is for informational purpose only)

Where can the loan be availed from ?

Loans can be availed usually from the native place of the student because of the KYC (Know Your Customer) requirements.

Does one need to provide a guarantor or any other kind of security?

Every education loan  requires co-applicant or joint borrowers such as parent, spouse, siblings, in-laws . For smaller amounts of loans (amounts upto Rs. 4 lakh) banks do not ask for any guarantor or security. However, most banks ask for either a guarantor or for some kind of security such government securities,gold, shares, fixed deposits,  LIC policies and real estate other investments etc.  At times banks ask for Third party guarantee . It means one’s uncle,  father’s friend or any of the relatives can make this third party guarantee. (First being applicant, second being co-applicant). This is to ensure if the first/second guaranteed person is unable to to pay then 3rd party person have to bear the loan.

·         For a loan up to Rs 4 lakh, co-obligation of parents is required

·         For loans above Rs 4 lakh and up to Rs 7.5 lakh, co-obligation of parents together with third party guarantee is required.

·      For loans above Rs 7.5 lakh, co-obligation of parents together with tangible collateral security of suitable value.

Are there any other fees applicable while taking this loan?

Banks may charge fees for approving the loan and doing  the paperwork called as the Processing fees. These fees range between 2.25% and 2.50%. Usually, the banks(especially public sector banks) do not charge any processing fees for education loan.

A student may need to bear the margin amount. A margin amount is the amount that the applicant bears himself/herself.  For example if a Bank offers a education loan  and the margin is 10 per cent. Then 90 per cent of the cost of the course will be borne by the bank and the balance 10 per cent has to be borne by the student/applicant. Normally, banks do not approve the loan that would cover the entire cost of your education. Margins are usually required for loans more than Rs 4 lakh and 5 percent and 15 percent respectively for study in India and abroad on loan above Rs. 4 lakhs.

What are the documents required while applying for the loan?

The required list of documents may vary from bank to bank. The most common documents are:

·         Proof of admission . Educational loan cannot be applied without proof that admission has been secured in the selected institution,

·         Schedule of fees from the institution

·         Mark sheet of the last qualifying examination

·         Photographs

If the applicant is earning then:

·         Bank account statement

·         Income tax assessment order of last 2 years

·         Proof of income

·         Brief statement of assets/liabilities

When the loan is required for studies abroad, one also need to have passport and visa ready along with the admission letter.

How much time does it take for education loan to be sanctioned?

Loan applications are received either directly at bank branches or through online. Sanction or rejection of a loan is supposed to be communicated within 15 days of receipt of duly completed application. Students can demand reasons for rejection of loan application in writing from banks.

How is the loan amount disbursed?

Disbursement of the educational loan is made directly to the institute or college to which the student has applied for admission. In the case of mess and hostel charges, the relevant amounts are given to the concerned authorities.  Initially, while applying for a loan, the bank will verify the tenure of the course, and determine the cost of the entire course, as applicable at that point of time. Then, each year, the applicant is required to submit a form available from the bank that gives the details of the money required, and then the bank directly disburses the loan to the college/institute.

In the case of air fare, which is also available for studies overseas, the amount is given directly to the airlines. Some banks do give the students themselves a certain amount on a monthly or quarterly basis for purchasing books, equipments and other related material associated with the course. This, again, depends on the discretion of the bank.

However, if a student has already taken admission and incurred expenses, banks reimburse these if the original receipts are produced within one month for studies in India and six weeks if the applicant is going overseas.

What is the process of education loan?

When does the repayment of the loan starts?

Normally, the repayment begins after the loan is disbursed and the payments(Equated Monthly Installments (EMI)) have to be made each month. But for Education Loans Repayment usually starts six months after the course completion or the starting of a job, whichever is earlier. The period during which  borrower is not required to make any repayment is called holiday period or moratorium period.

·         Interest calculations start as and when amounts are disbursed  and not on the entire loan amount at once.

·         During the moratorium period, on an education loan the bank will calculate interest on your loan on simple interest basis. This interest will be accumulated until the end of the moratorium period.

For example, if a loan amount of Rs 1 lakh is released at the start and interest rate is 11% per annum, a total interest of Rs 11,000 per annum or Rs 33,000 for a three-year moratorium period will be accumulated. At the end of moratorium, Rs 1,33,000 will be the amount on the basis of which future interest and EMI will be calculated.

There are some banks that offer a concessional interest rate (of 1%) if one agrees to pay the interest portion of the loan during the moratorium period.

Are there any tax benefits for educational loans?

The tax benefit on education loan is available under the Income Tax Section 80E.

·         Deduction is only on the interest component. One can deduct the entire interest paid (without any limit)

·         There is no deduction available for repayment of principal

·         Anyone who has taken education loan for self, spouse or children, is eligible to claim tax deduction.

·         The education loan should only be taken from approved charitable trust or a financial institution. In case you have taken loan from your relatives, friends or employer that amount would not qualify.

·         The deduction is applicable for the year you start paying your interest called as the Initial Assessment year.

·         The deduction is available in respect of the initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest is paid  in full, whichever is earlier.

·         The deduction is available for individual only and not for other type of assessee such as Hindu Undivided Family .

Interest certificate from the bank can be submitted to Employer in which case Form 16 will show the tax benefit. Else one can claim it while filing Income Tax return. In any case one needs to show it in Income Tax return

Source : http://www.bemoneyaware.com/blog/education-loans/.