Look around and you would find everything becoming more and more expensive: from eggs, to milk to petrol, you just have to name it. The same is true for the cost of education. Flip through any college admission prospects, especially for professional courses, and you will find the fees running into lakhs.
In some cases, the average education cost of a masters in business administration (MBA) degree has trebled in the last five years, according to recent reports. Even now, costs are high.So how do you cope up with the costs? You either save up over the years to fund your kid’s education and if you haven’t done so or want to go for higher studies yourself, your only recourse would be taking an education loan. Here is what you need to know before taking a loan.
Who can get a loan?
You can avail an education loan if you are an Indian citizen and already have a confirmed admission in an institute. Some lenders may approve a loan even before you get a confirmed admission.
Keep in mind that most lenders give a loan for individuals in the 16-35 years age group.
You may not get a loan for an institution next door, unless it meets the requirements of the lender. Lenders usually prefer to give loans for courses for a college degree, university courses and professional courses such as MBA, engineering and medical sciences.
Lenders usually look for reputed institutes and courses that promise good job prospects. Take the case of Rajesh Sangati, a Mumbai-based private sector employee. A graduate from the Indian Institute of Technology, he took a loan of Rs 20 lakh to pursue MBA from the Indian School of Business. “My loan got processed within an hour,” he said.
How much you get?
The loan amount depends on whether you are going to study in India or abroad. Lenders usually offer up to R15 lakh for your study in India. While for foreign universities, the loan amount could go up to R20 lakh. Some lenders ask for 5-15% of the loan amount as margin money.
However, some government-owned banks and non-banking finance companies (NBFCs) offer up to 100% of education expenses as loan and do not demand any margin money. These banks will ask for a collateral or co-application when the loan amount is high.
Collaterals and co-applications
Usually, for loans up to R7.5 lakh, you may not need to give a collateral or a security, but for loans above that, you will have to. A collateral need not only be a residential property. Lenders accept fixed deposits, insurance policies, National Savings Certificate and Kisan Vikas Patra as collateral. For government-owned banks, the limit could be around Rs 4-5 lakh.
Lenders may also insist on co-applicants on the loan. “Co-applicants have to be Indian passport holders,” said Bhonsle. “They need to have valid know-your-customer (KYC) documents such as personal identity and address proofs.”
Other usual requirements for co-applicants are financial documents such as bank statements, salary certificates, income-tax returns and so forth.
What are the costs?
The interest rate varies from lender to lender. Some banks, including Bank of Baroda, offer a fixed rate of interest, which is usually 2-2.5% above the bank’s base rate. “Education loans are on floating rates,” said said Prashant Bhonsle, country head, Credila Financial Services Pvt Ltd, an HDFC Ltd company. “The rate of interest ranges from 12.5% to 14.5% depending on the course, college/institute and university.” Keep in mind that women get a discount of 1% on the interest rate in government-owned banks.
The processing fee is around 2% of the loan amount. So if you have availed a loan of R20 lakh, you will need to shell out a processing fee of R40,000.
“If you can get a fixed rate loan, it would be better since you will know the exact amount you need to pay as an EMI,” said Kiran Telang, CFO, ABT Capital Advisors, a Mumbai-based financial planning firm. “With a floating rate loan, the interest rates may increase and managing the payments could get difficult.”
You can get an income-tax benefit for an education loan under section 80E of the Income-tax Act.
What about moratorium?
Simply put, moratorium is the period during which you don’t need to repay the loan. This period takes into account the duration of your course and extends up to a year after the course completion. Usually, if you get a job immediately after this period, the moratorium ends within six months of being employed. Once the moratorium period is over, you get seven years to repay the loan.
In fact, you can even payoff the interest component of the loan during the course and get an interest waiver of up to 1% for the moratorium period.
Choose your course carefully and don’t get into an education shop to get that degree. If you find a good place that will offer you a good job prospect, go for the loan.