10 Jun 2014

Education and Education Loan

We feel proud when our children study, do well and earn prestigious degrees. It is a feeling that is immeasurable and we encourage our little ones to strive for the best. The child should be at the top of the class, aim for high ranking colleges and universities and secure a job which pays a big fat salary. Earlier education costs were part of the budget but now it is a strain on the budget. A lot of students are now going in for an education loan. Is a loan worth it? Is it worth starting your first job with a big loan that you have to pay off?

Documents Required
When applying for a loan plenty of documents will be required. Mark sheets of the student, proof of admission, passport size photos, assets of the co-owner, salary slips of the borrower etc.

Loan Amount
The loan amount will vary depending upon the university or college location and the bank providing the loan. For colleges/universities within India, the loan amount limit is smaller. E.g. SBI is currently offering loans up to 4 lakhs for Indian education and HDFC is offering up to 10 lakhs. For foreign universities, SBI offers up to 30 lakhs and HDFC loans up to 100% of education expenses.

This is the lump-sum amount or down payment one must have before applying for a loan. For a smaller amount of loan, there is no margin. E.g. for a loan of up to 4 lakhs, SBI does not have a margin. For loans above 4 lakhs, the margin is 5% or 15% depending on whether it is an Indian or foreign university.

Security and Collateral
Depending on the loan amount a collateral may or may not be required. Security is provided in the form of a co-owner of a loan. E.g. SBI requires a co-owner for up to Rs.4,00,000. For an education loan over and above 4 lakhs a co-owner and some form of collateral is required.

Processing Fee
Banks may or may not charge a processing fee. PSUs usually do not charge a processing fee whereas private banks usually charge between 1 and 3% of the loan amount.

Interest Rates
Interest rates on student loans are high. They range between 13 and 15%. There are fixed and variable rate loans.

Repayment should begin after 1 year of finishing the degree or within 6 months of finding a job. The interest paid is deductible under Section 80E .

Should a student loan be taken?

Sometimes taking a loan for education becomes a reality. If you take a loan, be diligent about paying it back. If possible, pay back the interest even while your degree is on. If this is not possible, be aggressive about paying it back as soon as you get your first pay cheque.  Repayment period provided by the bank may be ten or twelve years. Target paying it off in less than that.

I wish I could make education affordable for everyone so that no one would have to take a loan. Needless to say, it may not be possible. Education is a right and everybody should have access to it. Before getting into a loan, read all the paperwork and promise yourself that you will make it a priority to pay it off.

Note - I am not advertising for any bank or organization.

1 comment:

  1. The high interest rates on student loans are unfair. There was a time when student loans were available at nominal rates. Hope the new govt. looks into this aspect to promote higher education among poorer sections of the populace...