The second wave of the Covid-19 pandemic has aggravated the challenges for many. Even young people are facing challenges when it comes to planning for their higher education. One of the most common ways to bridge any funding deficit for education is to take a loan. However, before applying for an education loan, you should be aware of a few key points, including its eligibility criteria, tax implication, etc.
Fulfilling eligibility criteria
If you are below 18 or don’t have a source of income, you can apply for an education loan with your parents or siblings as co-applicants. There is no collateral requirement for education loans up to Rs 4 lakh. For a loan amount of above Rs 4 lakh and up to Rs 7.5 lakh, the bank may ask for collateral if the income of the co-applicant is insufficient. For loan amounts above Rs 7.5 lakh, banks usually require a co-applicant and adequate tangible collateral security.
Before applying for an education loan, the student also needs to have a confirmation letter for admission in a recognised college as per UGC, AICTE, governments, etc. A loan is also allowed for admission in premier autonomous colleges such as IITs, IIMs, etc. Education loans are available for both undergraduate and post-graduate courses. You can also get an education loan for admission in a foreign college.
Education loan covers expenses such as fees or expenses for college/school, hostel accommodation, examination, libraries, laboratories, books, uniforms, purchase of computers, caution money deposit up to a defined limit, travel, two-wheeler purchase up to a specified limit, or other costs essential for the course.
How much loan to apply for
The upper limit of an education loan may vary depending on the type of course or college and also the borrower’s eligibility. For example, banks may allow a loan up to Rs 30 lakh for an MBA course in India, whereas it may allow a loan up to Rs 80 lakh or more for medical courses. Some banks allow a loan to the extent of 100% value of the tangible collateral security. Now the question arises, how much loan amount should you apply for?
The answer is not that simple. You should apply for a loan as per your current needs, future earning probability and collateral security availability. You may want to avoid taking a higher loan amount if you have a sufficient amount to pay from your own sources—this would help you save a lot in interest repayment. You may also avoid taking a loan for admission in a college where the fee is very high and the average salary on placement is very low—it could make it difficult for you to repay the loan after completing the course.
Loan repayment and tenure
Banks usually allow a tenure of up to 15 years after the commencement of repayment. Banks also allow a repayment moratorium/holiday of one year after the completion of the course or six months after getting a job, whichever is earlier. The interest accrued during the moratorium is added to the principal, and accordingly, the EMI amount is determined.
The interest paid in an education loan during the financial year for self or relative (spouse or children) can be availed as tax deduction under Section 80E of the Income Tax Act. There is no maximum limit to this and the entire interest paid during the financial year can be claimed as a tax deduction.
You must identify colleges and courses to which you plan to take admission after the results. It will help you estimate the loan amount that you’ll need, and you’ll get some time to arrange the collateral and the margin money. You can select the best lender as per your requirement on the basis of the loan amount, interest rate, processing charges, processing time, etc. Early planning will help you save time during the admission procedure.
The writer is CEO, BankBazaar.com