Tick on the Right Education Loan- Business News
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Tick on the Right Education Loan

An education loan makes it easier to pursue your dream education but it also means long repayment years, so make sure your choice is right

Tick on the Right Education Loan
Illustration by Raj Verma

Education is the best asset that parents can give to their children. As a parent, you want to make sure that whenever the need arises, the funds are available. But with the cost of education rising, there is a good chance of you falling short of the amount. Consider this - an MBA from IIM-Calcutta, which cost about Rs 12 lakh in 2010, now costs Rs 22 lakh. A Masters' degree from Harvard on an average cost around $48,000 in 2010, included tuition and boarding. It costs around $70,000 now, according to education consulting firm Mindler.

In such a situation it is not unusual to see parents use their life savings to help their children pursue their education. Experts, however, say you should avoid dipping into your retirement or emergency fund to finance your child's education. So, should lack of funds impede your child's studies? No, because education loans are readily available from public sector banks and private lenders, based on the track record of the college, student's academic performance and your own credit profile. However, one must note that the funding that makes life easier at the time of admission can become stressful at the time of repayment if you don't choose the loan wisely. Here's how you can prepare yourself to get the right amount of education loan for the right course at the best cost.

Get an Early Start

The moment of truth is when you get the confirmation of admission along with the details of fees you have to pay. Being aware of all financial help will help you figure out how much you need to arrange on your own. You need to calculate whether you have enough funds or need an education loan.

As you know the college fee, find out about scholarship or grant options. And a look at your savings or investments will give you an idea of how much education loan is needed. If you have enough investments in debt instruments, consider utilising them. "I have seen people taking education loans even if they have sufficient money available in taxable debt instruments such as fixed deposits and postal schemes. This is not a good idea. Parents need to consult a professional before opting for an education loan if they have high amounts invested in debt instruments," says Pankaaj Maalde, a certified financial planner. For the rest, you can approach public sector banks.

The situation becomes more complicated if the admission is to a foreign institute. Most banks ask for admission confirmation before granting the loan, while most universities prefer students with assured funding. Rohit Sethi, Director, ESS Global-Study Abroad Consultant, says parents should start arranging for funds at least four-five months in advance if the study is in a foreign institute. "Colleges take at least 3-4 four weeks to accept or reject an application. If accepted, banks, with all their formalities, take another one month to grant the loan approval. Then comes the major step of applying for the visa. That takes another month or so," he says.

HDFC Credila Financial Services, a dedicated education loan lender, has the provision to grant loans without a college admission letter. "We allow students and parents to know their loan eligibility in advance," says Arijit Sanyal, Managing Director and CEO of the company.

Setting the Loan Amount

Can you borrow the full amount of the college fee from a bank? While some banks do have mandatory margin requirement of up to 5 per cent for studying in India and up to 15 per cent for abroad, there are some that fund the entire fee. Rohit Mascarenhas, who works as a strategic account manager with Vodafone Global, had received the entire Rs 22 lakh college fee (with collateral) for an MBA from the Indian School of Business, Hyderabad, in 2015. Union Bank of India offered him a loan at 10 per cent interest rate for 10 years with his father as the guarantor.

Online portals are a good avenue to search for education loans. Vidyalakshmi education loan portal, an initiative by NSDL e-Governance Infrastructure, is one such portal. Here you can apply to three banks at one go. The Vidyasaarthi portal has information on scholarships and subsidies by the government and companies. "Students can apply for corporate scholarships depending on their income, educational background and career choice. They can also apply for government-sponsored scholarships," says Gagan Rai, MD and CEO, NSDL e-Governance Infrastructure.

When picking a bank, apart from loan amount, check out the moratorium period, interest rates, processing fees and best terms to pay back the loan. Some such as SBI and Indian Bank do not charge any processing fee. Check for early repayment options too. Some banks charge pre-payment fee, but if the loan is on a floating rate, they cannot levy prepayment fee or foreclosure charges. Many colleges also have tie-ups with various banks. If you approach these banks, the process is simpler but do check out other lenders as they may offer other benefits. Use loan aggregator websites such as BankBazaar and Myloancare to compare banks.

What if banks reject your loan application? "Before you approach any other lender, assess the reasons for rejection, because the same may apply to other loan applications. You could also consider taking a personal loan from banks, NBFCs (non-bank financial companies) or regulated lenders. Do note that the interest rate is likely to be higher compared to an education loan, and there will be no moratorium period," says Adhil Shetty, CEO, BankBazaar. Over the past few years, unconventional courses such as sports engineering, music, theatre, dance and acting have become quite popular. "Banks may not lend for such courses but NBFCs can," says C.S. Sudheer of IndianMoney.com, a personal finance advisory.

Understand Repayment Options During Moratorium

Sometimes, due to lack of awareness and time, parents end up taking the first loan offer that comes their way, unmindful of other options that may suit their needs better.

Most banks advertise their loan offers highlighting the longer duration of moratorium. Banks offer a 'holiday period', called moratorium, which includes study period and typically one year after that or six months after you get the job. This is the period during which you are not required to make interest or the principal repayment. Do note that simple interest rate starts accruing during the study period itself and extends until the moratorium lasts. You must plan in advance to keep paying the interest during study and the moratorium period before the repayment starts. If you don't pay it, the loan burden increases.

Saibal Das Mahapatra, who works as a consultant at Accenture in India, took a loan of Rs 18 lakh (without collateral; for Rs 25 lakh course fee) to do a one-year MBA course from a reputed institute. Andhra Bank offered him a loan at 10.25 per cent interest rate for 10 years. "Though I started paying back six months after completing the course, I was not aware that had I paid the interest during the moratorium period, my total loan liability would be lower," he says.

Paying interest during moratorium also helps you save on the overall cost of the loan. As per Indian Banks' Association (IBA) Model Education Loan Scheme, all scheduled commercial banks have to offer 1 per cent concession on interest rate if interest is serviced during the study period and the subsequent moratorium period, before repayment starts. If banks do not share such details, ask for them.

What if you have taken a loan for a Bachelor's degree but your child chooses to continue with a Masters' course instead of taking up a job? "The moratorium period would be extended until the course period of the Master's programme," says Virendra Sethi, Head - Mortgages and Other Retail Assets, Bank of Baroda.

How to Get Collateral-free Loan

According to IBA rules, banks are required to take collateral if the loan crosses Rs 7.5 lakh. "This could be in the form of land, building, government securities, public sector bonds, NSC (National Savings Certificate), KVP (Kisan Vikas Patra), life insurance policy, gold, shares, mutual fund units, debentures, bank deposits in the name of student/parent/guardian or any other third-party with suitable margin," says Ajay Kumar Srivastava, Executive Director, Indian Overseas Bank.

Some banks offer collateral-free loan for higher amounts as well if it is for elite colleges such as IIT, IIM, ISB and others. Bank of Baroda's Sethi says the bank has offered higher-value loans of up to Rs 40 lakh without collateral for a few premier colleges in India.

HDFC Credila also gives loans up to Rs 40 lakh without collateral. "We have extended unsecured loans without any collateral security to thousands of students. We are flexible on a case-to-case basis depending on multiple parameters such as the student's past academic track record, work experience, entrance test scores, future school/institute/university's reputation and employability, among others," says Sanyal.

If Going to Study Abroad

Aspirational India is increasingly looking abroad for higher education. But without a good scholarship, the expenses could be a deterrent. Some students get 25-50 per cent of the course fee as scholarship though the determining factors vary depending on the countries and universities in consideration, says Prateek Bhargava, CEO, Mindler.

"While the US and the UK are quite selective in granting scholarships to international students for popular courses, Canada and Australia are more liberal. Getting a fully funded scholarship for an international student to study at an Ivy League institute in the US and the G5 in the UK is very unlikely, with only a few exceptions in a year," he says.

A few governments offer subsidies to promote a university or a region. "The Australian government offers many scholarships to encourage students to opt for universities in regional and low-populated areas, but these are not under-developed areas. Such scholarships could go as high as AUD10,000 or AUD15,000 compared to the average scholarship of AUD5,000," says Sethi of ESS Global.

Most importantly, when studying abroad, your fee outgo may go higher than projected due to currency fluctuations. "Currency fluctuations should not be ignored as they can have a material impact on the total cost. Estimation errors on account of these fluctuations should be factored in at 3-5 per cent of the corpus," advises certified financial planner Arvind Rao.

Check with your bank beforehand if they will fund the additional cost if needed. "We are flexible with increasing the loan amount post loan disbursement, if required eligibility criteria is fulfilled," says Sanyal.

Government Subsidy, Support

The Ministry of Human Resource Development has launched a scheme, Central Sector Interest Subsidy Scheme, that provides interest subsidy during the moratorium period on education loans without any collateral security and third-party guarantee. This applies to technical and professional courses in India. There are some other conditions as well: students' annual gross parental or family income has to be up to Rs 4.5 lakh, loan amount has to be not more than Rs 7.5 lakh, and the interest subsidy is not more than Rs 2 lakh.

Another scheme, Padho Pardesh, is for students belonging to minority communities and with family income less than Rs 6 lakh. "The government provides interest subsidy during moratorium period, up to Rs 75,000 per quarter," says Sethi of Bank of Baroda.

The Dr. Ambedkar Central Scheme of Interest Subsidy supports students belonging to categories of Other Backward Classes and Economically Backward Classes, with family income less than Rs 8 lakh and Rs 2.5 lakh, respectively, for overseas studies. The interest subsidy during moratorium is up to Rs 75,000 per quarter.

Among corporate scholarships, some prominent ones are the Tata Scholarship, the BHEL-FAEA Scholarship and the IOCL Scholarship.

Plan Repayments in Advance

It's not enough to simply get a loan to pay for college. One has to pay it back, after all. Therefore, first do the due diligence in terms of the reputation of the college, placement record and salary levels of earlier students. The loan should not be so high that the expected salary is not enough to pay the EMIs. "When a student starts earning, all her monthly debt payments combined should ideally be no more than 40 per cent of her take-home income. Going above this limit could lead to financial stress," says Shetty of Bankbazaar.

If the college is abroad, figure out which accreditation system the particular country follows and whether the college is part of it. "To gauge if you will be able to service your loans and still save money, it is worthwhile to do a thorough assessment of the employability of the course and institution as well as past placement track records and starting packages. This will make you confident enough to repay the loan and maximise your return on investment," says Shalini Gupta, Co-founder and Chief Strategy Officer of MyLoanCare.in.

When it comes to repayment, you may allow your child to share the loan burden. This will not only make her more responsible but will also build a credible loan profile for her. EMIs anyway start only after study is over and employment starts. However, you could lighten the burden by paying the interest during the moratorium period.

To arrange for interest payment during the moratorium period, keep aside a part of the education fund you have. If there is a surplus after the moratorium is over, you could use it to share the EMI burden with your child. "Discussions about which portion of the EMI is to be paid by the parents and which is to be repaid by the students is important. Such an analysis in advance can lessen the chances of repayment difficulties at a later stage, reducing chances of NPAs and stress on families," says Sanyal.

Your child must understand the consequences of missing out even one EMI. "Non-payment would result in default, which will affect credit score and appear in credit report too," cautions Wilfred Sigler, Director-Marketing and Sales at CRIF High Mark, a credit information agency. A missed EMI will hurt the student's credit score, making it difficult for her to get loans in the future. "They might not be able to get even a credit card, let alone a high-value credit like a home loan," says Sigler.

If for some reason, you expect paying EMIs to be a problem, look for a solution. "Opt for longer repayment tenure, if possible. This keeps EMIs low. Do note that the cost of the loan goes up with a higher tenure," says Sudheer of IndianMoney.com. The advantage is that in the formative years of the career, the EMI burden would be lower.

If at any point, repayment of the loan looks difficult, you should approach the lender to reschedule it. With a bank, the facility is available thrice - each time for six months -during the loan tenure. Banks may restructure the loan by increasing the tenure and reducing the EMI but such an extension (after moratorium) is allowed only up to 15 years if the student is unemployed or under-employed. Do note that any extension of tenure increases the total loan liability.

Loan foreclosure can be done anytime, but some banks charge pre-payment fee. If the loan is on floating rate, banks cannot levy the foreclosure charges.

Not only does an education loan make higher studies a possibility, there is a tax benefit also available. The interest paid on an education loan can be claimed as deduction, as per Section 80(E) of the Income Tax Act, 1961, up to eight years or until the interest is fully repaid, whichever is earlier. There is no upper limit to the interest deduction.

Before your child steps out to pursue higher education, do your homework and choose the education loan that works for you.

@apri_sharma