Education loans have become an increasingly popular option among students, enabling them to pursue their desired courses at their dream universities. However, several factors, like interest rate, moratorium period, tenure, etc., have an impact on the overall cost of the education loan that the student must bear. Therefore, due diligence is required when applying for an education loan to avoid excessive costs. Consider the following factors while applying for an education loan:
Eligibility: Different lenders have different eligibility criteria for education loans. Some institutions offer education loans only for studying abroad, whereas others offer loans for inland and abroad studies. Sometimes, a co-applicant who can be a parent or guardian or spouse, etc., is mandatory. The loan can be available only for specific courses or even those offered in specific countries.
Interest rates: Interest rates and processing charges are the direct costs a student must bear. The interest rates for these loans depend primarily on the type of course, university, and academic track record. Also, various factors, such as credit rating, collateral, etc., affect interest rates. Therefore, students should improve their credit rating before applying for a loan to get the lowest possible rate.
Loan repayment: The repayment terms of the loan differ depending on the lender and the type of loan. With moratorium, there are two options.
a) With interest payment: The parent/student is required to pay interest (whether in full or in part) only on the disbursed loan amount. Principal repayment starts after the moratorium period.
b) Without interest payment: The parent/student is not required to pay interest. The interest during the period of study gets added to the loan amount, and the EMI (equated monthly installment) starts after the moratorium period (duration of the course plus 6 months or 1 year).
When the loan is without moratorium, the EMI starts immediately. It can significantly burden the students if the repayment starts immediately after the course ends. Therefore, knowing the repayment terms before taking the loan is crucial, as a default in repayment can damage the credit rating significantly.
Interest subsidies and government guarantee schemes: In India, the government offers interest subsidies through various schemes to promote higher education. These subsidies include Central Sector Interest Subsidy Scheme, Padhao Pardesh Scheme, Central Government Interest Subsidy Scheme, etc. Also, there are various schemes, such as Credit Guarantee Fund Scheme for Educational Loans (CGFSEL), Credit Guarantee Fund Scheme for Skill Development (CGFSSD), etc. which provide guarantees up to a certain limit. Some schemes are available for inland studies, and some provide assistance for studies abroad. The eligibility criteria are different for each of the schemes. Students should check whether any such scheme is available before applying for an education loan to reduce the overall cost of an education loan.
Amount of loan and early repayment: Although education loans provide the opportunity to fund high-cost education, students should keep the loan amount to a minimum. Loans with lower amounts can be repaid early and can save on interest. Taking excessive loans hampers the financial health of the student due to the increased cost of the loan. Hence, taking an education loan only for the required amount is vital. Also, students should consider repaying the education loan as soon as possible to reduce its overall cost. In most cases, no prepayment penalty is charged in the case of education loans. However, there is another option where students or co-applicants can repay only a part of the loan amount to cut down on the interest and EMI amount or to reduce the tenure. For instance, a student who borrows ₹20 lakh can repay ₹2 -3 lakh earlier to close a part of the loan. It is not necessary to do this before starting the EMI. This can be done anytime during the tenure of the loan.
Tax Planning: Section 80E of the Income Tax Act, 1961 allows a deduction of interest on education loans taken for the higher education of the individual, spouse or children of the individual. The deduction is available without any limit. Therefore, the education loan can be applied for and repaid after considering the tax planning opportunities.
Though funding higher education through our own finances is an ideal plan, it may not be possible to do so for everyone. To avoid excessive costs, consider the above factors, compare the available options and choose wisely.
Eela Dubey is co-founder of EduFund, an Ahmedabad-based edtech firm.
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Updated: 29 Jun 2023, 09:29 PM IST
