“Education is not a preparation for life; education is life itself,” a saying goes. It is everyone’s dream to study in the best colleges and universities whether in India or abroad.
Parents want their children to get a good degree from a reputable institution because it guarantees lifelong income and success. However, the cost of a good education is getting expensive day by day with institutions charging exorbitant fees. While only a few parents can afford to finance their child’s education, for millions of other aspirants, student loans are the way to make their dreams come true.
The education lending segment is dominated by public sector banks which account for 90% of these loans, while the rest was funded by private sector banks and NBFCs. Non-performing assets or NPA accounted for 8% of the total outstanding education loans of Rs 80,000 crores.
Here’s the truth about student loans:
Purpose of Student Loans
It helps to pursue undergraduate, graduate or postgraduate courses in various fields including engineering, medicine, management and information technology. The loan covers expenses incurred for tuition fees, accommodation costs, cost of books, laptops, and examination and library fees. Other expenses related to course completion, such as study trips or project work, are also included in the loan amount.
Loan amount and down payment
The loan amount may vary depending on the total course expenses and income of the borrower and his parents. Many banks provide loans of up to Rs 1.50 crore for study abroad at top universities. Incidentally, loans up to Rs 20 lakhs come under priority sector loans.
Generally, banks do not insist on a down payment or margin requirement for loans up to Rs 4 lakhs. For loans exceeding this amount, the margin is 5% for studies in India and 15% for studies abroad.
The interest rate is higher in the case of student loans due to their very nature of being unsecured. You can opt for a fixed rate or a variable rate. The interest rate varies according to the category of the university which can be AA, A, B or C for the IIM and AA for the IIT. The interest rate will be more than 10% for admission to colleges not included in the category or list of first-class institutions. A few banks give a concession on interest rates to daughters and borrowers who take out a life insurance policy and assign it in favor of the bank.
Moratorium and repayment period
Most banks allow a moratorium period (holiday period) of up to one year after completing the course or six months after getting a job, whichever comes first, which means you don’t have to pay IMEs during this period. You have the option of paying the interest during the holiday period. The repayment period can range from a few years to a maximum of 15 years depending on the amount of the loan.
Collateral guarantee and required documents
Most banks do not insist on collateral for loans up to Rs 7.50 lakhs. For loans above SR 7.50 lakhs, banks insist on collateral collateral like fixed deposits, life insurance policies or land and buildings.
Besides the usual documents such as ID, proof of address of the borrower and the co-applicant who will be the parent or guardian, income and bank statements, the most important document will be the letter of admission or the letter of offer from the university. provide a breakdown of costs. For study abroad, you must produce your passport and your TOEFL, IELTS, GRE and GMAT scores, as applicable. The co-applicant must have a good CIBIL score of around 700 for the loan not to be rejected.
Tax Benefits on Student Loans
The interest you pay on your student loan can be deducted under Section 80E of the Income Tax Act 1961 without any ceiling. You can claim the benefit for eight years from the day you started repaying your loan or until the interest component is paid off. The credit guarantee fund scheme for student loans provides guarantee to banks for the student loan to deserving and eligible students up to Rs 7.5 lakh.
Vidya Lakshmi Portal
Under the Pradhan Mantri Vidya Lakshmi program, the government provides assistance through the Vidya Lakshmi portal. The portal provides a one-stop-shop for students to access information on the various student loan programs offered by banks and to apply for a loan. You can download the loan application form and apply to several banks for student loans. You can also check the status of your loan application through the portal.
(The author is a Chartered Financial Analyst (CFA), a former banker and currently teaches at Manipal Academy of Higher Education, Bengaluru)