Guide to education loansQuality education is becoming more unaffordable as years go by. For example, an MBA in India costs approximately between Rs 7 lakh to Rs 25 lakh, depending on the educational institute that you want to study in. An MBA abroad is even more expensive and could cost anywhere from Rs 40 lakh to Rs 60 lakh. This is why an education loan might help.

Instead of desperately dipping into their retirement funds, parents today are okay with going for an education loan for their children. Repaying the education loan after getting a job will help instil a sense of responsibility and financial disciple in children. It will also help them build a good credit history if they repay the loan on time.

Here’s a list of frequently asked questions on education loans to help you pick the right loan for your child’s education. Read on.

What are the eligibility criteria for an education loan?

For the student, the eligibility criteria is that he/she should be an Indian citizen between 16 and 35 years. They should have successfully secured admission to an eligible course. Some banks like Kotak Mahindra Bank don’t have a minimum age criteria for students. Note that most banks insist that you secure admission to the course through a merit based selection process.

For education loans that you need for full-time courses, a co-applicant is mandatory. Banks state that the co-applicant should be a parent or guardian. Some banks allow siblings, spouse or blood relatives to be co-applicants. The co-applicant needs to be at least 21 years. The maximum age of the co-applicant can be 70 years. The loan eligibility will be calculated on the basis of the co-applicant’s income.

What are the documents required?

The documents will depend on whether you are going to study in India or abroad. Here’s the list of documents that the bank might ask you for:

¥ Completed loan application form
¥ Photographs of applicant and co-applicant
¥ Identity proof
¥ Address proof
¥ Relationship proof
¥ Bank verified signature
¥ Salary slip or Form 16 or 2 years Income Tax Return
¥ Asset details of the co-applicant, in case you are studying abroad
¥ Confirmed admission letter from an educational institution
¥ Details of course and fee break-up
¥ Mark sheets

For students who are studying abroad, the following documents may be required

¥ Admissions test scores (GMAT, GRE, etc.)
¥ Visa documents
¥ Travel documents like flight ticket

Does the loan offer assistance for all education expenses?

All course related expenses will be considered by the bank. This will include tuition fees, exam fees, refundable deposits, purchase of books, travel expenses if you are studying abroad, computer and laptops etc. There are some banks that fund miscellaneous expenses such as project work, thesis related expenses, study tours etc.

What is the loan amount provided by the bank?

The loan amount will depend on the course, income of the co-applicant and whether the student is studying in India or abroad. The maximum limit for education loan is about Rs 10 lakh to Rs. 20 lakh if the student is going to be in India. For studies abroad, banks provides loans of up to Rs 30 lakh.

You may not need any collateral or third-party guarantee for loan amounts of up to Rs 4 lakh. Most banks ask for a third party guarantee if the loan amount is Rs 4 lakh to Rs 7.5 lakh. Most banks ask the co-applicant for a collateral if the loan amount is more than Rs 7.5 lakh. The collateral can be land, property, gold, mutual funds etc.

Is there a loan margin?

Most banks do not charge a margin if the loan amount is less than Rs 4 lakhs. For loan amounts of up to Rs 7.5 lakh, the margin will be about 5%, that is, the bank will provide assistance for 95% of the cost and you will be paying 5% of the course expenses. For loan amounts of more than Rs 7.5 lakhs, the bank will set its own margins.

What is the tenure of the loan?

Most banks provide education loans for 5-7 years. There are some banks that provide loans for a tenure of up to 15 years.

When should you repay the loan?

Unlike other loans, education loans are study now, pay later loans. So, you needn’t repay the loan while you are studying. Education loans come with a moratorium period. This is the time where only the interest portion of the loan needs to be paid. Moratorium period is usually the number of years for the course plus 1 year or 6 months after the student gets a job, whichever is earlier.

There are some banks that provide interest moratorium where you don’t need to repay any part of the loan for a few years. You might have to start repaying the loan amount after you get a job. Typically, banks give six months’ time after getting employed to start repaying your loan.

Are there any tax benefits on education loan?

Once you start repaying the loan, you can claim tax deductions for your education loan under Section 80E of the Income Tax Act. Only the interest portion of your loan can be claimed as deduction. The principal portion of your loan amount does not qualify for any tax deduction.

All individuals paying interest on the loan for themselves, their spouse or their children can claim the deduction. The legal guardian to the student who is repaying the loan can claim this deduction too. You need to deduct the loan interest amount paid from your taxable income. Note that the tax benefit is available only if you have taken the loan from an approved lender.

What happens if there is a default?

If you don’t find a job within the time given by the bank, you can request an extension for loan repayment. The bank might extend your moratorium period if you request them. However, most banks might ask you to repay at least the interest portion of your loan. If your co-applicant can provide a guarantee, it could help. It is good to avoid defaults on repaying your loan as it not only affects your credit score, it also puts a dent on the co-applicant’s credit score.

Why is a life insurance policy needed for an education loan?

Most banks ask the borrower to avail a life insurance policy that is at least equal to the loan amount. The policy will be used as collateral by the bank. In case the co-applicant is no more, the bank will recover the outstanding loan amount from the life insurance policy. If there is any money remaining, it will be paid out to the student or the beneficiary of the policy.

Will the bank credit my account with the loan amount?

Once the loan application is accepted, the bank will directly disburse the loan amount to the educational institution as per the course program.
While taking an education loan is easy, you need to carefully plan your repayments.

So, apart from the interest rates, compare the moratorium period, loan tenure and other details when you choose your loan. The credit score of the co-applicant is also important to get the loan sanctioned.

Author
Kavya Balaji

Kavya Balaji is a senior writer with RupeeIQ.