Education loans are earning excessive popularity among students as they provide the means to pursue preferred courses at desired universities. However, diverse factors, like interest rates, tenure, and moratorium period, can affect the overall cost of the loan. Thus, it is important to perform exhaustive research and thorough consideration when applying for an education loan to prevent excessive financial burden. It is essential to consider the following factors while applying for an education loan:
Eligibility
Each lender has its different eligibility criteria for education loans. While some lenders may focus solely on providing loans for studying abroad, others may cater to both domestic and international studies. Certain institutions may also require the presence of a co-applicant, who can be a parent, guardian, spouse, or another individual.
Interest Rates
The expenses directly associated with student loans include interest rates and processing charges. The interest rates of these loans are primarily determined by factors such as the type of course, university, and academic performance. Additionally, various elements such as credit rating and collateral can influence interest rates.
Loan Repayments
The repayment conditions of the loan vary greatly depending on the lender and the specific loan type. In the case of a moratorium period, there are two options available.
a) With interest payment: In this option, the parent or student is bound to pay interest, either in full or partially, only on the disbursed loan amount. The repayment of the principal amount begins after the moratorium period ends.
b) Without interest payment: Under this option, there is no requirement to pay interest during the moratorium period. Instead, the interest accrued during the study period is added to the loan amount, and the Equated Monthly Installment (EMI) starts after the moratorium period (which includes the duration of the course plus an additional 6 months or 1 year).
In the absence of a moratorium period, the EMI begins immediately. This can inflict a significant burden on students if the repayment starts right after the completion of the course. Thus, it is crucial to understand the repayment terms before taking the loan, as defaulting on repayments can have a detrimental impact on one’s credit rating.
Interest Subsidies and Government Guarantee Schemes
In India, the government has introduced several schemes to facilitate higher education by offering interest subsidies and guarantees on educational loans. These subsidies are provided through schemes like the Central Sector Interest Subsidy Scheme, Padhao Pardesh Scheme, and Central Government Interest Subsidy Scheme, among others. Additionally, guarantee schemes such as the Credit Guarantee Fund Scheme for Educational Loans (CGFSEL) and Credit Guarantee Fund Scheme for Skill Development (CGFSSD) are available, ensuring loan guarantees up to specific limits. These schemes cater to both domestic and international studies.
Amount of loan and early repayment
While education loans offer a means to finance expensive education, students must borrow only the minimum needed amount. By keeping the loan amount low, students can repay the loan earlier, leading to savings on interest payments. Taking out exorbitant loans can harm the student’s financial well-being due to the inflated cost of borrowing. Further, students should consider repaying their education loan as soon as possible to reduce overall costs. In several cases, there is no prepayment penalty for education loans, allowing borrowers to make early repayments without any additional charges. Alternatively, borrowers or co-applicants have the option to repay a portion of the loan amount to lower the interest and equated monthly installment (EMI) amount or to reduce the loan tenure.
Tax Planning
Under Section 80E of the Income Tax Act, of 1961, individuals can claim a deduction for the interest paid on education loans taken for higher education purposes of themselves, their spouse, or their children. This deduction has no upper limit, providing an advantageous tax planning opportunity. Considering this provision while applying for education loans and planning their repayment is essential. While financing higher education using personal funds is an ideal scenario, it may not be feasible for everyone. To avoid excessive expenses, it is important to consider the factors mentioned above, compare the available options, and make a well-informed decision.
