While applying for an education loan to study in India, factor in the tuition fees, living expenses and purchase of equipment
Financing higher education requires thorough planning and groundwork. Be it a low- or high-ticket loan, financing a degree course, or a certificate course, students should carefully select the source of their finance.
Ankit Mehra, founder and chief executive, GyanDhan, an edu fintech company, said, “The foremost step in planning for an education loan is ensuring the programme and college are worth the investment. Applying for an education loan is a huge and long commitment and should not be taken just because it is available. A typical education loan tenure is around five years to seven years and requires on-time repayments to maintain a perfect Cibil score."
Pre-planning: How to plan to take an education loan
If you choose a course that does not assure employment, applying for a loan is not a financially prudent decision. Once you select the right course and college, make a list of estimated expenses. While applying for an education loan to study in India, factor in the tuition fees, living expenses and purchase of equipment. There can be additional costs like travel expenses and health insurance, if the loan is to finance an education abroad.
After figuring out the estimated costs, move on to selecting a lender that satisfies the student’s financial needs. Compare offers of different lenders, different types of loans (secured and unsecured education loans) and various loan products. Depending on whether the borrower is pledging collateral or not, the loan amount, interest rate and processing fees can vary.
Mehra further said, “A lower interest rate and processing fee brings down the loan cost. A borrower’s application with a good Cibil score, immaculate credit history is bound to get better terms and interest rates. Another aspect that can help bring down the cost is applying for an amount after a thorough analysis of the expected initial salary. Students should study the job market and keep their salary expectations as realistic as possible to ensure that they do not take on more debt than required. That is an essential factor in loan repayment."
Since the students’ future earning potential dictates their repaying capacity, they must take the above details into account wisely while evaluating the loan amount.
Post planning: How to plan repayment of the loan
Most often, when you repay the education loan, you choose a longer loan tenure to keep the equated monthly instalments (EMIs) low. While this may seem like a practical decision, it effectively increases the total cost of the loan. Besides, you should also be aware of the tax benefits of an education loan to reduce the loan cost.
As per Section 80E of the Income Tax Act, the deduction is allowed on the total interest amount of the EMI paid during the financial year for a maximum period of 8 years. Further, you have to obtain a certificate from the bank. The principal and interest amounts of the education loan paid during the financial year should have to be mentioned separately in that certificate. The reason behind this is that no deduction is allowed on the principal repayment amount.
These tax benefits are not available on loans from every lender, making it imperative for students to do their due diligence. Adhil Shetty, CEO, BankBazaar.com, said that a tax deduction from your loan is helpful. But one should not be enamoured by it nor stretch the loan to maximize such a deduction. The deduction on education loans is for interest paid. The money is not coming back to you, unlike other deductions like ELSS (equity linked saving scheme) or PPF (public provident fund).
Your strategy should be uncomplicated: become debt-free as soon as you can, especially if you’re paying a high interest rate.
“Conversely, if your loan rate is very low, you can consider taking a slightly longer route to repayment, not necessarily for tax deductions, but to lower your EMIs and free up your income for pursuits such as investment and wealth creation at a comparatively higher rate. In either case, you should repay your loan in a manner comfortable to your finances without straining your ability to fulfil other needs such as paying rent," Shetty added.
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