Over one lakh people from India keys in the words ‘education loan’ or similar phrases every month on the search engine. According to Google AdWords Keyword tool.This therefore finds the huge need for such loans in india in recent times.Education is expensive, especially if one is aiming for a premium institution or a foreign degree. Education loans can be a big help and it stands as a part of the priority lending category along with housing loans.
We need to understand two important factors before a loan deal:
- A default may spoil the credit score of both the student and his parents. The borrowers will not only come in the bad books of banks, the collateral will be at risk as well.
- The repayment starts after ‘repayment holiday‘, that is, one year after the end of studies or six months after getting a job, whichever is earlier. The borrower must have a proper repayment strategy in place before EMIs start.
Therefore loan undertaking and its proper disbursement should be planned and comes under a financial planning which must be planned through a financial planner, CFP.As we all know that a penny saved is penny earned. As investment need a planning, these loans need a proper planning too, for its smooth disbursement and to ensure favorable cost at its close we should keep in mind few summed up points:
- Student borrowers get many relaxations. These can be used to make the repayment smoother. Margin money-a percentage of expenses that you pay while the bank pays the rest-is required on all loans above Rs 4 lakh. The rule is 5 per cent for studying in India and 15 per cent for studying abroad. However, many banks relax this rule for meritorious students.
- Women can seek a lower rate as they are eligible for a 0.5 per cent concession.
- Banks also have special schemes, including interest subvention, for economically weak and differently-abled students.
- Do not take the entire loan in one go but in installments which will reduce the interest burden.
- You can also repay some interest during the study period to lower EMIs. The bank starts levying interest from the time of disbursement at the end of each course year or semester. The amount keeps adding up, increasing the debt burden. However, if you pay simple interest on the principal during the study period, your EMIs will be reduced to a large extent. Many banks also give a 1 per cent interest concession to those who repay the interest debited during the moratorium period.
- Start by reducing your extra expenses. Repayment does not start immediately. The extra time can be used to build a corpus by reducing certain expenses.
- The interest rate is typically the base rate plus a fixed spread; say 1-2 per cent, which varies from bank to bank. If you are earning enough and are able to save some money after paying the current EMI and other expenses, use the spare money to create a buffer in case of any increase in interest rate.
- Considering that prepayment involves paying a penalty, you need a proper cost-benefit analysis.
- Enough surpluses should be maintained (at least 3 installments) so that EMI servicing continues uninterrupted.
- However, what if the market is down and the borrower fails to get good income or a job, the tenure can be extended up to 10 years for loans up to Rs 7.5 lakh as usually it has tenures of five-seven years and 15 years for loans above it. Banks also give an extension if the student is unable to complete the course on time for reasons beyond his/her control. The maximum extension in such situations is two years.