Parents’ guide to education loans

NEW DELHI: The education of their children is a critical goal for almost all Indian parents. However, while providing the best education is priority, not many parents may be able to meet this goal. This is because the cost of education has been spiralling, with education inflation pegged at a whopping 10%. Therefore, starting to save early is critical.The amount to be kept aside will balloon with every year’s delay.
However, despite starting early, one can still fall short of the required corpus. This is where education loans come in. As a parent, don’t baulk at the idea of taking this loan because not only does it help to upskill a child, it also comes with attractive tax benefits. Let us look at why an education loan makes sense, what you need to consider and the pitfalls to watch out for.
Bridge the shortfall
Spiralling costs is not the only reason why you could fail to accumulate adequate money for your child’s education. A shortfall can occur because of a change in the nature of the goal. For instance, you may have budgeted for sending your child to one of the best institutes of higher learning in India, only to have your child opting for higher studies abroad. However, this is no excuse for not planning early. An existing corpus makes it easy to get a loan.
The shortfall may also be due to other expenses you did not foresee at the time of planning. For instance, most parents consider tuition fees, exam fees and hostel expenses, but tend to forget about living expenses and the like. If the child goes to study abroad, the living expenses would be steep. Since no financial institution will fund post-course expenses, keep aside a part of savings to fund these, while relying on the loan to meet the cost of tuition fees.
Advantages many
Tax deduction for interest under Section 80E is the main advantage of an education loan. This deduction is available to the parent and the child, depending on who repays the loan.
Repaying an education loan at the start of their career is a good way to instil financial discipline in young people. Since taking an education loan and repaying it on time also helps to establish credit scores, several parents insist upon their children taking this route. Many young people also want to fund their own higher education even if their parents have the money.
What to look for:
Interest
This is the most important factor. Education loans in India don’t come cheap (see chart). Since the aggregate NPA is very high—9.5-10%—banks charge a higher interest. However, banks reduce the interest by 1% if the interest is paid while the child is studying and the loan is repaid without any default thereafter.
The institute of choice also has a bearing on interest rates (see chart). Banks readily give loans for those opting for premier institutes at low interest rates, because the employment opportunities for pass outs from these institutes are many. Most institutions offer special rebate of 25-50 bps for girls.

Collateral
Since defaults are common, PSU banks usually insist on collateral for loans above ₹7.5 lakh. Though several financial institutions provide education loans without collateral or mortgage, it is better to provide one to reduce interest costs. Accepted collaterals include a house, a plot or fixed deposits.
Co-borrower or guarantor
Most financial institutions insist on a parent or guardian as the co-borrower/ guarantor. The number of years of service of parents plays an important role here. Pune-based Shashank Shukla, 27, was forced to pay 15% interest on his loan. “Since my father is about to retire, the lending bank did not consider him as a loan guarantor and charged me higher interest rates,” he says.
Margin money
Check how much the financial institution will fund and how much you need to put in. Your contribution is known as the margin money. This requirement varies depending on the lending institution, amount of loan and place of study. For example, PSU banks usually charge 5% margin for loans above ₹4 lakh for students studying at Indian institutes and 15% for studies abroad. Private players, on the other hand, are ready to fund without any margin requirements.
Moratorium
EMIs don’t start immediately for educational loans. In addition to the course period, there will another moratorium period of 6 to 12 months for looking for a job. If the parent pays interest during the course and moratorium period, the EMI will be based on principal only. If the borrower decides not to pay interest, the same will be accumulated and EMI will be based on loan plus accumulated interest. Most Indian parents prefer to pay interest during the course time.
Duration
The maximum duration institutions used to give loans for was 7 years, which has now been extended to 15 years. This has meant a reduced EMI. In other words, the child will be able to service the loan it even if the initial salary is low. Since there is no prepayment penalty, it is better to opt for the longest possible duration.
Documentation
The documentation is similar to that of other loans. On an average, a credit score above 700 is considered good. The lenders will also insist on admission related documents. Papers related to the collateral will also need to be submitted. For example, if you are pledging your flat in a housing society, you need to submit documents like share certificate, original sale deed, no objection certificate (NOC) from the society, etc.
Speed
This is critical because most institutes will not give too much time to secure admission. PSU banks are not as quick as private lenders when it comes to disbursing education loans. This means, you need to start the process a early.
Taking pre-approval and keeping the tentative loan ready is one way to speed up the process. Several foreign institutes insist you demonstrate the ability to pay fees and pre-approved letters come in handy then. However, the final disbursement happens only after your ward gets confirmed admission.
Diversifying your loan application can be another strategy. Approaching just one financial institution is a mistake. It is better to start the process with 2-3 institutions simultaneously. Since 90% of the documentation will be similar, this will not be a burden. However, you may have to pay processing fees to all the institutions.
Final word
Don’t treat an education loan as the only source of funds. Most universities offer scholarships for deserving candidates. Explore such options.