If you're an aspiring graduate, or an experienced professional enrolling into a professional MBA program or higher studies, chances are you might need to fund your university education. It also might be one of the biggest financial decisions you make that will impact your earnings potential and financial goals in the long-term.
While securing educational loans has become pretty commonplace with all major financial institutions following standard practices in granting these loans, here are some tips to keep in mind before you sign up for one.
Finding funds
In India, most major financial institutions -- from public banks to private institutions including NBFCs such as Credai -- offer student loans. As per government mandate, banks can disburse up to Rs 4 lakhs without requiring collateral; anything above that amount typically requires a co-applicant and proof of security that will form the collateral backing the loan. Banks typically lend up to Rs 10 lakh for higher studies at Indian institutes and up to Rs 20 lakh for programs abroad.
You may also need to pay your bank 5 per cent of your loan amount in the form of margin money for domestic programs, and up to 15 per cent for studies abroad that typically require higher loan amounts.
While most banks follow a standard interest rates offering 1.35 to 3 percentage points above the Marginal Cost of Funds based Lending Rate (MCLR), some banks can give out cheaper interest rates depending on specific criteria. For instance, State Bank of India (SBI) has recently launched an 8.5 per cent interest rate on education loans for certain business schools such as Indian Institute of Management (IIM)-Ahmedabad and Indian School of Business-Hyderabad.
Unconventional avenues
There are also a number of emerging fin-tech players that have also begun offering loans to students with less onerous requirements than traditional banks. For example, P2P lending platform, Faircent.com, has teamed up with Bangalore-based micro-lending startups to offer student loans that require only part of the collateral. Another fin-tech startup Quiklo provides loans and financing to students to help them purchase study accessories including phones and laptops. Quiklo says its education finance platform will lend to students who have been declined loans in the past.
Govt push
To facilitate student loans, the Indian government's Vidya Lakshmi Portal also provides a platform where people can apply and compare educational loans from different institutions. The website connects students with multiple banks, providing updates on the loan process and links to other government financial aid and scholarships. Of course, approaching your existing financial institution where you or your family already have a banking relationship, could make the process faster.
Use a loan calculator
It's a good idea to use an online loan calculator to estimate how your repayment plan will look like along with details on expected EMIs. Most loans have a 5-7 year repayment period, but larger loans can offer longer repayment periods, depending on your financial institution. These loan calculators can also help assess the eligibility criteria for these loans.
Avoid the debt trap
Experts recommend paying down your student debt early before the interest rates compound prolonging your loan repayment. There are reports of some banks slapping interest rates even on the moratorium period-- the grace period during which a loan does not become due which is usually six months after getting employment or one year after completing a course. Always factor in any processing fees or hidden penalties such as prepayment penalties or higher interest rates while signing up for loans that could compound overtime and eat away at your hard earned income.
Tax benefits
You can claim deductions on your annual taxes if you're paying down student debt under the Section 80E of the I-T Act. These benefits will bring down your tax liability so it's important to keep track of the necessary paperwork to claim these tax breaks on the interest payments. These tax deductions can be claimed by individuals as well as family members who are funding the education of their children or spouse.
Ask your employer
If you're an experienced professional pursuing a part-time program, or taking a study leave, some employers can fund part of your higher studies. It's a good idea to check with your employer on their employee education and training benefits programs before applying for expensive bank loans.