Look around and you would find everything becoming more and more expensive: from eggs, to milk to petrol, you just have to name it. The same is true for the cost of education. Flip through any college admission prospects, especially for professional courses, and you will find the fees running into lakhs. And, if it’s a foreign degree you are eying, the cost may increase manifold.
In some cases, the average education cost of a masters in business administration (MBA) degree has trebled in the last five years, according to recent reports. Even now, costs are high. For example, an MBA from a good institute would cost Rs 15-20 lakh. Second-rung colleges may offer it for around Rs 5 lakh. For an engineering or medical degree, a good private college would cost you up to Rs 1-2 lakh per semester or Rs 2-4 lakh per annum or Rs 10-16 lakh for the entire four-five-year course.
What clicks: IIT graduate Rajesh Sangati got a loan in an hour for his MBA.Photo: Abhijit Bhatlekar/Mint
Then there are living expenses to bear. So how do you cope up with the costs? You either save up over the years to fund your kid’s education and if you haven’t done so or want to go for higher studies yourself, your only recourse would be taking an education loan. Unlike any other loan, an education loan increases your earning potential for the rest of your life. Here is what you need to know before taking a loan.
Who can get a loan?
You can avail an education loan if you are an Indian citizen and already have a confirmed admission in an institute. Some lenders may approve a loan even before you get a confirmed admission.
Keep in mind that most lenders give a loan for individuals in the 16-35 years age group. Says Prashant Bhonsle, country head, Credila Financial Services Pvt. Ltd, an HDFC Ltd company, “Normally, tuition fees is covered in education loans. We also cover the living expenses, books and tutorials and some part of travel costs.”
Which institutes are eligible?
You may not get a loan for an institution next door, unless it meets the requirements of the lender. Lenders usually prefer to give loans for courses for a college degree, university courses and professional courses such as MBA, engineering and medical sciences.
Lenders usually look for reputed institutes and courses that promise good job prospects. In fact, if the institution is renowned enough, the entire process can become really smooth. Take the case of Rajesh Sangati, a Mumbai-based private sector employee. A graduate from the Indian Institute of Technology, he took a loan of Rs 20 lakh to pursue MBA from the Indian School of Business. “My loan got processed within an hour,” he says. Lenders usually have an internal list of approved institutions.
How much you get?
The loan amount depends on whether you are going to study in India or abroad. Lenders usually offer up to Rs 15 lakh for your study in India. While for foreign universities, the loan amount could go up to Rs 20 lakh. Some lenders ask for 5-15% of the loan amount as margin money.
However, some government-owned banks and non-banking finance companies (NBFCs) offer up to 100% of education expenses as loan and do not demand any margin money. These banks will ask for a collateral or co-application when the loan amount is high.
Collaterals and co-applications
Usually, for loans up to Rs 7.5 lakh, you may not need to give a collateral or a security, but for loans above that, you will have to. A collateral need not only be a residential property. Lenders accept fixed deposits, insurance policies, National Savings Certificate and Kisan Vikas Patra as collateral. For government-owned banks, the limit could be around Rs 4-5 lakh.
Lenders may also insist on co-applicants on the loan. Bhonsle says. “Co-applicants have to be Indian passport holders. They need to have valid know-your-customer (KYC) documents such as personal identity and address proofs. If they have availed loans and or have credit cards, their repayment history should be clean.”
Other usual requirements for co-applicants are financial documents such as bank statements, salary certificates, income-tax returns and so on. But keep in mind that the collateral and co-applicant or co-borrower requirement varies from lender to lender. If you have secured admission in a reputed college, the lender may not ask for it.
What are the costs?
The interest rate varies from lender to lender. Some banks, including Bank of Baroda, offer a fixed rate of interest, which is usually 2-2.5% above the bank’s base rate. There are lenders that give a loan on a floating rate of interest as well.
Says Bhonsle, “Education loans are on floating rates. The rate of interest ranges from 12.5% to 14.5% depending on the course, college/institute and university.” Keep in mind that women get a discount of 1% on the interest rate in government-owned banks.
The processing fee is around 2% of the loan amount. So if you have availed a loan of Rs 20 lakh, you will need to shell out a processing fee of Rs 40,000. Says Kiran Telang, chief financial officer, ABT Capital Advisors, a Mumbai-based financial planning firm, “If you can get a fixed rate loan, it would be better since you will know the exact amount you need to pay as an equated monthly instalment. With a floating rate loan, the interest rates may increase and managing the payments could get difficult, if you haven’t been able to get a decent-paying job.”
You can get an income-tax benefit for an education loan under section 80E of the Income-tax Act.
What about moratorium?
Simply put, moratorium is the period during which you don’t need to repay the loan. This period takes into account the duration of your course and extends up to a year after the course completion. Usually, if you get a job immediately after this period, the moratorium ends within six months of being employed. Once the moratorium period is over, you get seven years to repay the loan.
In fact, you can even payoff the interest component of the loan during the course and get an interest waiver of up to 1% for the moratorium period.
Choose your course carefully and don’t get into an education shop to get that degree. If you find a good place that will offer you a good job prospect, go for the loan.