As education costs go up in India, parents find it increasingly difficult to fund their children’s education. As such, most people end up taking education loans.
Most banks and non-banking financial institutions (NBFCs) today offer education loans to pursue higher studies in India and abroad.
Credit rating agency CRISIL said that 90 per cent of such loans are for studying abroad. It forecasts that NBFCs’ assets under management in education loans would grow by around 40 per cent in FY2023-24. But one must remember the following points before taking a loan.
Set A Clear Future Goal
Before taking an education loan, you should be clear about your career goal, earning prospects, potential salary, and chances of getting a job immediately after you complete the course.
After considering these factors, you can decide the amount and tenure of the loan. For most banks, the maximum term of an education loan is 15 years.
Check Eligibility
The banks determine the loan eligibility based on the college, course, whether the loan is secured, and the likely repayment. So you should always check whether the institution or university you are getting admission into is recognised because if the institution shuts down for any reason, you will still have to pay back your loan.
For unsecured loans, you must check separately with banks and other loan providers to confirm the loan eligibility and collateral required, especially for a higher amount.
For instance, Axis Bank provides unsecured education loans for up to Rs 50 lakh, but you must provide collateral if the amount goes up.
Tax Benefit
Education loan comes with tax benefits under section 80E of the Income-tax Act. The benefit is available only on the interest amount and not the principal.
Tax benefits on education loans can be availed of by self, spouse, or parents. But tax benefits should not be the primary reason for availing of a loan. You must check whether the course is good enough or will create opportunities for you to earn and lead a better life.
Also note that the tax benefits can be availed only for the initial assessment year (The assessment year relevant to the previous year, in which the loan repayment started) and for seven years after that or until the loan, together with interest, is repaid in full. While selecting the term, if you choose 10 years or more, be aware that the tax exemption period is only valid for eight years.
Take Loan In Installments
As you may have to pay the fee every semester and not in one go in the beginning, you can check with your bank for loan disbursal in installments. The reason is that the bank will charge you interest from day one for the amount you take. So you should check with the lender if the loan can be disbursed as and when required instead of in a lump sum.
Repayment Charges Or Other Fees
The last and most important thing to check is the repayment mechanism. Always check the repayment option and how soon you can start paying back. You must also check if there are any hidden charges; for example, sometimes banks take prepayment penalty or interest for the entire term even if you repay the loan early. Also, sometimes banks offer you life insurance on the education loan and charge for the premium. So, check whether it is mandatory or optional and ascertain your need for this additional life cover. If you are already covered for a sufficient sum, you can avoid opting for life cover at extra cost to your loan.
If you are planning for an education loan, check out the Vidya Lakshmi portal for students, developed under the guidance of the finance ministry, education ministry, and the Indian Banks Association. It could be a good option to start with.
