With the rising cost of education, parents -- especially among the middle-class -- often find themselves in a predicament. While they aspire to give their children the best education possible, the finances required deter them from embarking on this journey.Degrees in engineering, medicine, computer science or management are available for worthy students, but expenses upwards of 10 lakh present a real quandary. Once you start visualising foreign education, the numbers triple and quadruple.
In such a situation, parents often have to borrow from relatives or friends. Otherwise, they can choose to avail of personal loans; but these prove rather expensive because of hefty interest rates.
Another option is an educational loan, which are categorised as priority sector lending for public sector banks. Therefore, their interest rates compare favourably to the interest rates of personal loans; consequently, they are less expensive. Here are some requisite things you need to garner an educational loan.
Education loans are available for Indian nationals in order to pursue higher education in India or abroad. All courses that have employment prospects are eligible for an education loan. These include graduation courses, post-graduation courses, engineering, medicine, CA/ICWA/MBA or other courses approved by the UGC/Government.
Even evening courses of approved institutes are eligible. For studying abroad, graduation/post-graduation and professional courses like MCA, MBA, MS and others are included in the list.
The expenses covered under the education loan are: fees payable to college/hostel, examination fee, library/laboratory fee, purchase of books/equipment, any security deposit(s) and the purchase of a computer. Travel expenses are covered for those studying abroad. Interestingly, the State Bank of India also covers the cost of two-wheelers -- up to Rs 50,000.
The maximum loan possible varies from bank to bank. But in general, for studies within India, the maximum amount is between Rs 7.5 lakh and Rs 10 lakh. For education abroad, the maximum loan amount is Rs 15 lakh to Rs 20 lakh. For instance, IDBI bank gives maximum of Rs 7.5 lakh for studies in India and Rs 15 lakh for studies abroad whereas SBI provides maximum Rs 10 lakh for studies in India and Rs 20 lakh for studies abroad.
Interest rates on educational loans range from 11.25 percent to 13.5 percent. For example, SBI charges 11.25 percent for loans up to Rs 4 lakh and 13.25 percent for loans above Rs 4 lakh. Bank Of Baroda charges 12.5 percent for loans up to Rs 4 lakh and 13.5 percent for loans above Rs 4 lakh.
Processing fees vary from bank to bank. For example, PSU banks do not charge any processing fee, whereas IDBI charges 2.25 percent as a processing fee.
There is no margin money for loans up to Rs 4 lakh. For loans above Rs 4 lakh, the margin money has to be 5 percent for education in India and 15 percent for education abroad.
Usually, there is no security deposit for loans under Rs 4 lakhs. Loans above Rs 4 lakh and up to Rs 7.5 lakh require a third party guarantee. And loans above Rs 7.5 lakh may require tangible collateral security for full value of the loan.
The repayment of a loan generally begins 6 months following completion of courses. The tenure of the education loan ranges between 5 years to 10 years, depending on bank and loan amount.
Documentation required
• Marksheet of last qualifying examination
• Proof of admission
• Schedule of expenses
• Borrower's bank account statement
• Income tax assessment order of last 2 years
• Proof of income
• Brief statement of assets/liabilities
Tax benefits
The deduction under section 80 E of the Income-Tax Act provides for the interest paid on educational loans; there is no cap on the interest amount being paid. This deduction once applied only for self-education, but now this facility is extended for the education of relatives; relatives include only one's spouse and children.
This deduction is allowed for 7 years and the loan must be taken for higher education purposes only. Moreover, the loan has to be from a financial institution or a government approved charitable institution.
Suppose an individual takes an educational loan of Rs 5 lakh for 7 years and the interest rate is 13.25 percent. He/she starts earning Rs 5 lakh per annum, after completing his/her education. Once he/she starts repaying the loan, his/her equated monthly instalment (EMI) is Rs 9,164. Annually, this individual will be paying Rs 1,09,968.
In the first year of payment, the interest component will be Rs 64,350. So he/she can claim deduction of this amount from his total income. As a result, he/she will be saving Rs 21,872 towards tax. So, considering the tax benefit, the effective interest rate on the loan comes to around 10.75 (instead of 13.25) percent for that particular year.
The prospect of raising funds in order to meet higher education fees is overwhelming to many families. Hopefully, with the increasingly attractive option of educational loans, more families will be able to successfully manage this difficult process.