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Several private institutions have educational lending desks of banks in their premises. When choosing the institute and course you want to take, don’t be tempted by the easy availability of education loans. “The decision must be independent of whether or not to finance with a loan. The institute and course should suit you and the decision should be based on what you want to do in the future,” said Adhil Shetty, CEO of Bankbazaar.com.
Look for the best interest rates before taking out a loan
Banks offer the loans at a lower interest rate if the student is admitted to a prominent institution
Rates for top rated institutes; Will be slightly higher for other institutes. List is indicative only.
Once you have identified the course, determine the loan amount you need. In addition to tuition, you need to factor in other expenses such as hostel fees, clutter costs, other incidentals, etc. Subtract from these total expenses the amount your parents pay. The amount that you have left is the borrowed amount that you need.
Make sure that the course you are taking will help you repay the loan. “Just as banks judge a borrower’s earning capacity based on the institution and course, borrowers also need to see if they can repay the loan based on that course’s job prospects,” said Ranjit Punja, CEO of CreditMantri. Historical placement data and the salary offered can serve as indicators. Think of the “average salary” and not the top salary offered to a handful. “Make sure you EMI is no more than 30% of the future salary to take home,” says Punja.
Look around for rates
You have to hunt for the lowest rates (see chart). Make full use of the Vidyalakshmi portal (www.vidyalakshmi.co.in), operated by NSDL, which provides the details of all banks offering education loans in one place. Banks usually lend at lower rates to leading institutions such as IIMs and IITs.
For example, Indian Bank offers loans at an interest rate of 9.95% for students who are on their way to IITs, IIMs, and IISc. It charges 10.45% for students at NITs and 11.75% for other students. For private institutions, banks usually distinguish between students who get access through the government quota and through the management quota. While cheaper than personal loans, student loans are more expensive than home loans. “A student loan is more expensive because it is an unsecured loan, while the mortgage is secured,” explains Punja.
When the loan amount is high, banks usually ask for a guarantor, who is the guardian in most cases. Taking advantage of the guardian’s credit or offering collateral are the ways to reduce the cost of education loans. Most banks provide loans for up to 10 years and extend this term to 15 years for large loans -‘7.5 lakh or more. So what should be the ideal tenure? There is no fixed answer. While the EMI is long less duration loans, the total interest payment is much higher. “An advantage of taking out a long-term loan is that you can bring the EMI below the proposed 30% limit.” says Punja. You don’t have to worry about the high interest payment either. You have the option to repay the loan early.
However, since the interest on a student loan is tax-deductible up to eight years under Section 80E, it is better to prepay long-term loans within eight years. “Treat this as the prepayment of other tax-advantaged loans. If there are better investment opportunities that offer a better return than the tax-adjusted cost of an education loan, don’t pay back; otherwise pay back”, advises Punja.
Do not abuse moratorium
A unique feature of education loans is the moratorium period. The borrower has the option of not paying the EMI until 12 months after the course ends or six months after starting work, whichever is sooner. Please note, however, that this moratorium is not an interest-free period. The interest continues during the period that you do not pay any EMIs. “It is advisable to start paying back EMIs as soon as possible to reduce the interest burden,” says Shetty. Since a student loan is usually the first loan that one takes out, one can also achieve a good credit score by paying it back on time.
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