Education from a renowned institute is often considered an important stepping stone, leading the way to successful career. However, the cost of education is increasing rapidly and an education loan seems like a great option who maybe short on funds. If you’re considering taking an education loan, here are some things you should keep in mind, before you decide:
Evaluate and weigh up offers
Before applying for a loan, make sure to check with multiple lenders that will provide you with best moratorium period interest rate and terms to pay back the loan prior to making a final decision. Aggregator sites can help you compare interest rates across various banks and help you choose the best rate.
Carefully comprehend lender’s collateral requirement
Lenders can provide 100% of the loan depending on the amount. As per RBI rules, margin money (self-finance) is required for the loan amount up to INR 4 lakhs. If you are planning your higher studies in India 5% of the money has to be self financed and for an education abroad, the margin money is 15%. Banks do not ask for collateral if the amount is within INR 4 lakhs. The need for a guarantor arises only when the amount is between INR 4 lakhs to 7.5 lakhs, and for funding above INR 7.5 lakhs an asset needs to be pledged as a security to the bank, just in case the borrower fails to pay back the loan.
Maintain a good credit score
Generally, a parent or a guardian is the ‘guarantor’ when their child is applying for education loan. This is also the case if the student does not have a credit history and the lender requires a friend or a family member to be the guarantor of the loan. In cases like this, it is imperative that the guarantor should have a good credit score to ensure that the loan application is not denied. A credit score of 750+ can also help the applicant get better rates from the lender. Remember, any default in payment affects not only your credit history but also that of the co applicant.
Work out your repayment strategy
Check this out with the lender. Normally student starts loan repayment after he/she starts earning and there are possibilities that earning does not start immediately after the course ends. In some cases students may be provided a grace period of one year before they start paying the loan amount, this is called the moratorium period. So make sure you get this point checked positively.
Tax benefits
Taking an education loan also has certain perks like a tax benefit. Under Section 80E of the IT Act, the borrower can claim deduction on the entire interest part of the loan. There is no limit to the amount of interest you can claim as a deduction. This deduction is available to you up to 8 years or till the repayment of interest in full, whichever is earlier.
Case study
Kiana has applied for a student loan where she would need a sum of 40 lakhs to finance her education at ULCA Anderson School of Management. Now, the bank would ask for the margin money that has to be paid by Kiana. To do the calculation of margin amount you can use the formula: {1-(sanctioned loan amount/overall expenses)*100}. The overall expense is equal to INR 40 lakhs and the sanctioned loan amount is 34 lakhs. The margin percentage would be 15%, which means Kiana needs to pay the rest of INR 6 lakhs by herself.
Keep these points in mind, and you can easily plan your education without a worry. Hope this was useful, now go and get that degree!
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