Education Loan – Tips to Consider


Need for Education Loan

India is a vast country with great disparities of income and there are many children who cannot afford the cost of education. But, India has a policy of right to basic education for every child. Thus, all children have access to free education up to 10th standard. However, when it comes to higher education, students and their families have to foot the bill to pay for the cost of higher education.

Thankfully, a number of financial institutions offer personal loan for education in India to help students meet the cost of higher education. Even the government has stepped in to regulate the education loan process to ensure that students get maximum benefits out of the loans.

Since the cost of education is going up year on year, it is advisable to look at an education loan carefully before availing one.

Before you decide to go for an educational loan or a student loan, we want you to consider the following 9 tips which will help you to evaluate all aspects of the loan and then come to a well thought out decision.

1. Make sure of the course you want to pursue

Remember, an undergraduate course runs for 3, 4 or 5 years depending on the subject. You will be committing a minimum of 3 years to the course. It is in your best interest to make sure the course you have chosen is the most appropriate one. You should try to seek admission in an Indian college as the costs of education in India are much lower than abroad.

2. Choose a good college approved by the lender for granting education loan

Many lenders look at the pedigree of the educational institution where you propose to study. Check with the lender whether the institution you wish to study in, is on the approved list.

3. Estimate all the costs to determine the total cost

You can include all costs associated with the course – tuition fees, accommodation or hostel charges, food costs, transportation, computer time, laptop, books and any other costs. Obtain the approval from the lender for the total cost for the entire duration of the course.

4. Draw the loan amounts only when you need the funds

Though you get approval for the total loan amount, you should draw the amount only when you need the funds. There is no point in drawing all the three-year tuition fee in one go. You will incur interest charges unnecessarily.

5. Study the tax benefit that is available to you and your parents

Educational loans qualify for tax benefits when you start repayment. Interest payments qualify for deductions up to 8 years from the date of the first repayment. Interest charged is simple interest during the course of study. The lender will add the accrued interest to the principal loan amount to determine the outstanding loan amount. You can negotiate with the lender to determine the EMI payable based on your ability to repay. Remember loan repayment starts within 1 year after completion of studies or earlier if you are employed before that.

6. If you can, pay off the interest during the course of the study

Since interest charged during the course of study is simple interest, it makes sense to pay off the interest when it is due. Remember that if you do not pay off the interest it gets added to the principal loan amount thus pushing up the outstanding loan amount. You will then pay interest calculated using the compound interest formula.

7. Exhaust all other avenues for funding before deciding on the educational loan

There are many scholarships available from colleges and universities and philanthropic organizations. Check these out and then determine the total loan amount you may require as a loan.

8. Make the maximum use of the education loan if you land a well-paying job

After studies, you land a good well-paying job you can consider repaying the loan for the full 8 years during which tax benefit is available. You can decide to keep the education loan because it gives tax breaks and the interest rate is low as compared to other loans except for home loans.

9. Keep good relationship with the lender

Remember that your student loan will come in handy for your credit score later in life if you need other loans to fund a home or a car or a business. Ensure you pay your EMIs well on time without any defaults in repayment.

The tips highlighted above are some of the important aspects you should consider besides other aspects before you make your decision on the quantum of educational loan you may want to take. Remember, these loans come under the personal loan umbrella. Discuss with the bank or NBFC such as Tata Capital to understand the education loan process so that you get the best deal.