Achieving the dream of an overseas education
4 min read 10 Apr 2022, 11:07 PM ISTIf you are repaying an education loan, you can claim tax deduction on the interest paid for up to 8 years u/s 80E
PremiumYou can fund your overseas education or that of your child’s using investments or education loans. If you are a parent or a student looking to take an education loan, here are a few factors to consider:
Loan amount: Education loans usually cover the course fees and other expenses associated with getting an education overseas such as living expenses, examination fees, study material, travel expenses, and insurance.
You can get loans ranging between ₹20 lakh and up to a maximum of ₹1.5 crore Most lenders mention the expenses included in the loan amount and students should be diligent about ensuring most of these expenses are also included in an insurance policy. This reduces the financial burden of an overseas education greatly.
Margin money: A student must finance a fixed part of the financial requirement, or margin money,for overseas education and avail of an education loan for the rest. Some lenders do not even require the student to contribute such margin money. Others require the margin to be brought in on a year-on-year basis as and when disbursements are made on a pro-rata basis.
Tenure: Most lenders give education loans with tenures ranging from 1 to 15 years.
Interest Rate: Interest rates on overseas education loans depend on the tenure and ticket size of the loans. Lenders also consider the students’ repayment capability, merit-worthiness, and job prospects after their education to ascertain the rate. Interest is calculated using simple interest and most lenders provide a floating interest rate that is their own base lending rate plus a spread. The interest rate ranges from 6.6% to 24%.
Collateral: An overseas education loan can either be secured or unsecured. If a student takes a secured loan, a tangible collateral has to be provided as security in case the person defaults on repayment. Some lenders give an option between a third-party guarantee and collateral. However, many lenders insist on the collateral if the loan is above ₹7.5 lakh. While secured loans help negotiate better terms with the lender or even get a higher loan amount, it is important to note that lenders can take possession of the collateral— which can be an asset like a house or property—if repayment is not done diligently.
Repayment: An overseas education loan has to be repaid by the student. However, the good part is that repayment needs to start only after the course is over. Further, lenders usually allow for a moratorium period or repayment holiday.
This moratorium period, which allows students time to start repayment, can be of a few months post their course completion or a few months post their securing a job. This moratorium period differs from lender to lender.
Lenders: Primarily, students in India can get loans from banks and non-banking financial companies (NBFCs). Banks and financing corporations/institutions are options for securing a loan outside the country. While a pre-admission loan sanction can be availed for the purpose of application to universities, a confirmed admission is required for the final disbursement of the loan.
Tax Benefit: Under Section 80E, you can claim tax deduction on the interest paid for up to eight years— starting from the year in which repayment starts or until the interest is fully repaid, whichever is earlier. It is important to ensure that the loan is taken from a bank or notified financial institution or approved charitable institution. Tax deduction cannot be claimed for education loan taken from informal sources, be it friends or family. However, legal guardians for any student are eligible to claim deductions if they have availed of such a loan. There is no maximum limit to claim a deduction. Yet, only interest payment is eligible for deduction, and not the principal amount.
Investment corpus: An alternative route to building your education corpus is by putting money aside each year and starting a systematic investment plan (SIP) .
“We advise families to start a SIP in an equity-oriented mutual fund as soon as the child is born, keeping an estimated corpus in mind. Regular SIPs from the time the child is born till the child reaches the age of higher education will ensure a sufficient corpus is built. Once the child is 12-14 years of age and there is more clarity on the child’s aspirations to study overseas, parents should review their corpus and increase investments. Once it is clear that the child wishes to study overseas, investments can also be made in international index funds to counter exchange rate difference", explained Nishith Baldevdas, a Sebi registered investment advisor and founder of Shree Financial.
If the required education corpus is not built by the time the child is ready to apply to universities, then the family can carefully asses the quantum of loan to be taken to bridge the funding gap.
“Emotional decisions like tapping into the retirement corpus or health corpus should be avoided. You can take a loan for education, but no one will lend you money for retirement", said Baldevdas.
