Understanding Education Loan: Education is not cheap anymore, and it is getting more expensive for Higher education, especially if one is opting for foreign education. Hence, the requirement for an education loan is financial aid provided to meritorious but indigent students for matching the expenses of their higher education in India or outside. This article will provide a detailed explanation about education loan, what it is, the process of getting an education loan, the repayment process, and benefits from tax under section 80E.
What is an Education Loan?
To pursue higher education, educational loans are available. Higher education implies the study of any pursued course after passing the Senior Secondary Examination or its equivalent from any school, university or board acknowledged by a local authority or the State Government or Central Government or by any other authority authorized by the local authority or State Government or Central Government to do so.
The course can be a graduate or post-graduate course in technology, engineering, management, applied or pure sciences, including mathematics and statistics, architecture, medicine, etc., which should certainly be full-time and can be pursued in India or abroad.
A tax deduction can be implied for a taken education loan.
What is Covered Under the Education Loan?
All incurred expenses in higher education, such as admission, tuition, examination and library fees or the cost of purchasing books, electronic equipment, computers and other equipment, are taken care of by Education loans.
If hostel and college are far, then a loan is also offered for two-wheelers by some banks like State Bank of India.
Travel expense shall also be included in the loan amount if the loan is being taken for studies overseas. The loan may also account for health insurance as medical expenses are high in certain countries like the US.
For overseas studies, the student gets this amount in dollars, and the amount is paid directly to the institution abroad, although the bank is in India. The banks, as per RBI norms, may strictly charge students a fee for this service.
Where are These Educational Loans Given?
Most of the financial banks and institutions give out educational loans as they are included as part of banks’ priority sector. The public sector banks are considered to be at the forefront of such loans as per the Reserve Bank of India (RBI).
The place to avail of the loan:
Loans can be usually available from the applicant’s native place or student because of the KYC requirements (Know Your Customer).
Why has Higher Education Become So Expensive?
Education has become very expensive, and the proximate causes of tuition inflation are familiar: administrative bloat, a model dependent on high-wage labour, overbuilding of campus amenities, and the apparent availability of subsidized student loans.
The present market has allowed these cost inefficiencies to persist. Due to all of these factors, Higher education is getting more expensive. The survey done on Rising Education costs shows that school education for a child in 2011 cost Rs. 94,000 annually in India for a single child.
Eligibility Criteria for an Education Loan
The eligibility criteria for an educational loan:
Eligibility criteria for an educational loan may vary from bank to bank. Some general criteria are:
- The institution must be recognized.
- Confirmed Admission Letter from institute or college.
- The student age must be between 16-26 (for some banks, 16-35 years).
- The student must hold an excellent academic record.
- Regular income of co-applicant/parent.
Maximum Amount Lent by Bank
The maximum amount lent by the bank: Under the scheme for education loan, an individual can avail of a loan for studies up to Rs 10 lakh in India and Rs 20 lakh for abroad.
The interest applicable on Educational loans: The interest rates depending on the amount of the loan taken vary from bank to bank. Education loans are customarily on floating rates where the interest rates may change.
As the Bank of Baroda, some banks offer a fixed interest rate, which is usually 2-2.5% above the base rate of the bank. For female students, special concessions on interest rates of 0.5/1 percent are available.
Typically, the rate of interest ranges between 9% to 14% on educational loans. The rate may vary depending on the opted course, university and college/institute. For students who have successfully secured admission to premier institutions, Banks usually offer concessions. For instance, if anyone joins an IIT or IIM, the person’s loan might be cheaper by half a percentage point.
Educations Loans are very prevalent in the US, where students take Student Loans to finance their own studies. Even Former President of USA Barack Obama and his wife Michelle Obama took Educational Loans.
It is essential to compare the available loans. One should compare the rates of educational loans at comparing websites and verify it with the bank.
Things that are required to provide as a guarantor or any other kind of security:
Every education loan needs joint borrowers or co-applicant such as a parent, siblings, spouse, in-laws. Banks usually do not ask for any security or guarantor for smaller amounts of loans (amounts up to Rs. 4 lakh). However, most banks demand either a guarantor or some kind of security such as government securities, fixed deposits, gold, shares, LIC policies and real estate, other investments, etc. At times banks may ask for a third-party guarantee.
It means one’s father’s friend, uncle, or any of the relatives can make this third-party guarantee. (First being the applicant, and second, being the co-applicant). This is to guarantee if the first/second guaranteed person is incompetent to pay, then 3rd party person shall be held responsible or has to bear the loan.
- Co-obligation of parents is required for a loan up to Rs 4 lakh.
- Co-obligation of parents together with a third-party guarantee is required for loans more than Rs 4 lakh and up to a limit of 7.5 lakh.
- Co-obligation of both the parents together with tangible collateral security of suitable value for loans above 7.5 lakh.
Any other fees that are applicable while taking this loan:
For doing the paperwork and approving the loan, few banks may charge fees called Processing fees. These fees range within 2.25% and 2.50%. Usually, for education loans, the banks(mainly public sector banks) do not charge any processing fees.
A student may require to bear the margin amount. An amount that is bears applicants themself is known as margin amount. For example, if a Bank proposes an education loan and the margin amount is 10 percent. Then 90 percent of the course’s total cost will be borne by the bank, and the rest 10 percent balance has to be borne by the applicant/student.
Normally, banks do not approve or get confidence for the loan that would cover the entire cost of an individual’s education. Margins are usually needed for loans of 5 percent and 15 percent or more than Rs 4 lakh respectively for study in India and on loan above Rs. 4 lakhs for studying abroad.
Documents Required While Applying for Loan
The documents that required while applying for the loan:
- The required list of documents for the loan application may vary from bank to bank.
- The most standard documents are:
- Proof of admission because an educational loan cannot be administered without proof that admission has been secured in the chosen institution.
- Structure or schedule of fees from the institution.
- Mark sheet of the last qualifying examination of the applicant.
- Photographs of the applicant.
If the applicant is earning, then:
- Statement of Bank account
- Proof of income.
- The last two years’, Income tax assessment order.
- A brief statement of liabilities/assets.
- If the loan is needed for studies abroad, the person, along with the admission letter, also needs to have a passport and visa ready.
What is the Process of Education Loan?
One can take an education loan by following the step by step process:
- Apply: Approach many lenders and fill in the application form with each. Your existing bank may give you a better deal.
- Verification Process: Submit relevant documents. The lender will verify your application status with the mentioned institute. If collateral security is needed, ensure such papers are in place. The credit history of the co-borrower, if any, will also be checked.
- Know Your Course: In the personal interview, the lender may ask questions regarding the course, institute and potential future income. It is good to be prepared with all the necessary details.
- Promissory Note: Once the loan is sanctioned, the student will get a promissory note from the bank, and the applicant has to sign it.
- Final Disbursal: Once the documentation, verification and signing formalities are completed, the lender will disburse the loan. Some lenders disburse the fee directly to the college or institute.
How is the Disbursed Of The Loan Amount?
Disbursement of the educational loan amount is made directly to the college or institute to which the student has applied for admission. In the case of hostel and mess charges, the relevant amounts are transferred to the concerned authorities.
Initially, the bank will check the tenure of the course and evaluate the cost of the entire course while applying for a loan, as applicable at that point in time. Then, each year, a form available from the bank that gives the details of the money required is needed to submit by the applicant, and then the bank directly disburses the loan amount to the institute/college.
In the case of airfare for studies overseas, it is also possible that the amount is transferred directly to the airlines. Some banks provide the students with a specific amount on a quarterly or monthly basis for purchasing equipment, other related material and books associated with the course. This, again, depends on the preference of the bank.
However, suppose a student has already incurred expenses by taking admission. In that case, banks refund these if the original receipts of all the payments are produced within a month for studies in India and six weeks if the applicant is leaving overseas.
The amount of time taken for an education loan to be sanctioned:
Loan applications are received either online or directly at bank branches. Sanction or rejection of a proposed loan amount is supposed to be communicated with the applicant within 15 days of the draft of a duly completed application. In writing, students can demand the reasons for rejection of loan applications from banks.
Repayment Of The Loan And When It Starts
Normally, after the loan is disbursed, the repayment begins, and the payments(Equated Monthly Installments (EMI)) have to be made every month. But for Education Loans, Repayment of the loaned amount usually starts six months after the completion of the course or the starting of a job, whichever is earlier. The period during which the borrower is not obligated to make any repayment is called the moratorium period or the holiday period. The calculations or interest start as and when amounts are disbursed and not at once on the entire loan amount.
During the moratorium period, the bank will assess interest on the loan provided on a simple interest basis on an education loan. This interest will be gathered until the end of the period of moratorium.
For example, suppose a total loan amount of Rs 1 lakh is released for a student at the start, and the interest rate is 12% per annum. Total interest of Rs 12,000 per annum or Rs 36,000 of moratorium period for three-year will be gathered in that case. At the end of the moratorium period, Rs 1,36,000 will be the amount on the basis of which future EMI and interest will be calculated.
If a person agrees to pay the interest portion amount of the loan during the moratorium period, few banks offer a concessional rate of interest (of 1%).
Penalty Charged for Pre-Payment
The penalty varies differently for the bank. Usually, Nationalized banks do not have any pre-payment charges, but foreign and private banks usually charge a penalty, which normally ranges from 0.25 percent to 2 percent of the prominent loan amount.
The documentation required to post the sanction of the loan: At the time of every disbursement required, the progress reports should be provided. The progress report incorporates mark sheets or, in case the mark sheets are not available, a letter from the Institute while processing the fresh disbursement.
Legal Proceedings Against The Defaulter: The default or student is gets reported to the Credit Information Bureau Limited (CIBIL) and will be reflected in his credit information in case the student is unable to pay the loan. This can hugely affect the credit history of the student. In case of defaults, Legal proceedings take place against the defaulter. In such cases, collateral can be also be seized.
Consequences of being faced for taking a break from studies: If the individual, due to some unfortunate reason, is unable to complete the course, the individual will have to start repaying the EMIs immediately. Some banks might provide the students some grace period, either to continue their studies or to begin repaying the loan. But this is entirely the discretion of the specific bank.
Consequences of being faced for not getting a job: For genuine and exceptional cases where the student is not receiving a job due to macroeconomic conditions, lenders may reconsider extending the repayment period. Usually, tenures of five-seven years are provided to education loans. However, as per the guidelines, for loans up to Rs 7.5 lakh, the tenure can be lengthened up to 10 years and 15 years for loans above it.
What are the Tax Benefits for Educational Loans?
Under Section 80E of the Income Tax Rules, the benefit of an education loan is availed:
The deduction is made only on the component of interest. An individual can deduct the whole interest paid (without any limit).
For repayment of principal, there is no deduction available.
An individual is eligible to claim the tax deduction if the person has taken an education loan for themself, spouse or children.
The education loan should only be obtained from an approved financial institution or a charitable trust. In case one has taken a loan from their relatives, employer, or friends, that expense would not qualify.
The deduction is applicable for the year one starts paying their interest, called the Initial Assessment year.
The deduction is available immediately succeeding the initial assessment year or until the interest is paid in full, whichever is earlier, regarding the first assessment year and seven assessment years.
The deduction is not available for other types of assessee such as Hindu Undivided Family and for individual only.
Interest certificate from the bank, in such case like Form 16 that shows the tax benefits should be submitted to the Employer. Else an applicant can claim it while filing an Income Tax return. In any case, the person needs to show it in the Income Tax return.
Subsidy Scheme In Education Loan
The government of India, on 24th June 2010, approved a Scheme under the Educational Loan Scheme to implement full interest subsidy throughout the period of moratorium on loans attained by students belonging to economically weaker sections for pursuing any of the approved courses of studies in professional and technical streams, from recognized institutions or college in India.
The interest will be paid by the Government of India to the respective banks. From the calendar year 2009-10, it is applicable. The benefits under this scheme apply to those students with an annual gross family/parental income maximum limit of Rs. 4.5 lac annually (from all sources). For certification of the status of income for the scheme, the students must present income proof from public authorities as authorized by the State Governments.