Lessons on credit

Ensure your child can fulfill his ambitions, even if you don't have adequate funds, by availing of an education loan.

Pritam P. Hans | Print Edition: February 2011

"A cauliflower is nothing but a cabbage with a college education."
- Mark Twain, American novelist.

Even if you agree with the famous writer's disdain for higher education, you cannot contend the fact that it does increase the worth of a person while providing access to better opportunities (currently, the cauliflower is a more expensive commodity than cabbage in the Delhi vegetable market).

When you plan your child's future, education is at the top of the priority list. However, the higher you go in pursuit of it, the more expensive it becomes. An early start to saving for your children's education will help you meet the expenses and enable them to fulfill their ambitions.

If you pay the interest on the loan during the study period, you can get a concession of 1 per cent.
Deputy General Manager (Retail Banking Division),
Punjab National Bank
However, if you haven't started as yet or have a meagre corpus and your child is already on the brink of becoming a collegiate, do not despair. An education loan can help you tide over. "Our government says no one should be deprived of education for want of money. If a student has secured admission to a recognised institution and lacks financial support, he should have access to a loan," says Vivek Arya, deputy general manager (retail banking division), Punjab National Bank.

Anyone who has secured admission to a recognised educational institution in the country or abroad is eligible for a loan under the Model Education Loan Scheme prepared by the Indian Bankers' Association.

The loan can be availed of for school and college education as well as specified courses, such as chartered accounting. Some banks, such as Punjab National Bank, are also willing to provide a loan if you are pursuing an evening course or a diploma, as long as it is from a recognised institution.

Under the education loan scheme, you can avail of a loan up to Rs 10 lakh for studies in India and Rs 20 lakh for studies abroad. No collateral is required for loans up to Rs 7.5 lakh. However, parents, a guardian or a spouse must become co-obligators for the loan. If the loan amount exceeds Rs 4 lakh, one also needs to provide a third-party guarantee.

Rs 20 lakh
is the maximum amount of education loan you can avail of if you want to study abroad.
When you apply for an education loan of more than Rs 7.5 lakh, you will also have to furnish adequate collateral. For loans in excess of Rs 4 lakh, banks will ask for a margin amount of 5 per cent for studies in India and 15 per cent for studies abroad. A scholarship or any other assistance qualifies as the margin money.

Education loans take care of all expenses incurred, including various fees, such as admission, tuition, examination and library fees, and cost of purchasing books, computers and other equipment.

If the loan is being taken for studies overseas, travel expense is also included in the loan amount. As medical expenses are high in countries such as the US, the loan also accounts for health insurance. Banks usually make all the payments directly to the institution.

However, if a student has already taken admission and incurred expenses, banks reimburse these if the original receipts are produced within one month for studies in India and six weeks if the applicant is going overseas.

Unlike regular loans, education loans enjoy some concessions. Firstly, education loans enjoy a long moratorium period. Neither the interest accrued nor the principal amount is required to be serviced during the course period. There is an additional holiday period of one year or six months after securing a job, whichever comes earlier.

For the repayment holiday period, banks charge a simple interest on these loans on a monthly or quarterly basis. This brings down the cost of borrowing money for education. "If someone services the interest during the study period, an interest concession of one percentage point is given," says Arya.

Banks also offer additional concessions to students who have secured admission to premier institutions. For instance, if you are joining an IIT or IIM, your loan will be cheaper by half a percentage point. You will also be exempted from providing a third-party guarantee for loans up to Rs 7.5 lakh.

Female students can avail of an additional half a percentage point in the interest charges. Students from economically weaker sections are eligible for an interest subsidy during the moratorium period for loans taken for pursuing professional and technical courses.

Banks also offer top-up loans for higher education. In such a case, the loan is due only after the student has completed higher studies.

You will only be able to get a loan after you furnish proof of admission, such as a letter from the institution. You will also have to provide a schedule of expenses for the course. "Loans can be availed of only from the native place of the student because of the KYC (Know Your Customer) requirements," says Arya.

If your institution does not have accreditation, your loan application will be rejected. "If the institute is not on our list, we do make the effort to check its credentials," says Arya. However, there is no guarantee that the loan will be sanctioned.

We check the borrower's credit rating and loan
history to avoid loan defaults and bad debt.

GM, Central Bank of India
A student's or his family's poor credit history can also lead to the loan application being rejected. "Checking the borrower's credit rating and loan history helps banks avoid a possible default and bad debt," says B.N.S. Ratnakar, general manager, Central Bank of India. When the loan is required for studies abroad, you also need to have your passport and visa ready along with the admission letter.

An education loan application is processed within 7-15 days. There is no upfront fee for the applications for studies in India, but if you're planning to go abroad, you need to deposit up to Rs 5,000. Though there are co-obligators for an education loan, the liability to repay the loan is on the student borrower. After the moratorium period is over, the loan is to be repaid in equated monthly instalment in five-seven years.

So you no longer have to bear the guilt of thwarting your child's ambitions due to a lack of funds. There's always a helping hand to aid you.


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