What You Need to Know
Why speed is important in an education loan?
The first time the child steps out of the secure and safe home environment and plunges headlong into the world of higher studies, far away from home, is a tough time for everyone in the family.
Suddenly, there is no warm and comfortable home to return to after classes, no mom waiting with hot food, no room with all the amenities parents can provide.
Instead there is a hostel, a PG or a mess in a strange new city. With kids of own age and older ones – all toughing it out as they take their first steps into independence and learn to stand on their own two feet.
For a child who is stepping out of home for the first time and for her parents, this is a time to take care of numerous things.
Learning more about the college, finding acquaintances and friends whose kids have studies in the same college or city, buying and packing the right stuff, if it is overseas studies then choosing stuff within the allowed weight restrictions – it is true that the 1-2 months one has at hand are not enough to take care of so many things.
This should be a time to look forward to, of planning, of hope and fear but also exhilaration.
And certainly not a time to meet bank official after bank official – each of whom asks for umpteen documents and papers and drive you nearly bonkers with their slow approach to something that should not take a couple of hours to process and approve.
If you are like the rest of us, getting the education loan approved seems like the biggest headache you have ever faced.
There are numerous stories of people who had some of the most terrible and stressful time of their lives while getting the loan approved so they can meet admission deadlines.
This is more so if one is going abroad. From meeting Visa requirements to getting a cheaper ticket, from depositing the initial fees to being able to turn up for the first day of class – everything hinges on the loan.
The criticality of getting the loan on time cannot be stressed enough.
At this stage, having to run from pillar to post creates undue stress and heartburn and leaves a distinctly bad taste in the mouth.
Compare this with a loan that is processed well on time, where you know what documents you need to provide, where the bank updates you of the time within which the loan will be approved, where you do not have to run here and there simply to get an answer – doesn’t that make your life easier?
You can spend quality time with your child, your family, all of you can plan to go and drop her off in her college, see the new city and have a good time. This is how it should be.
And that is what Finance Dragon wants to help you with.
Don’t other things like interest rate or amount matter?
You may wonder why other matters such as loan amount, interest rates, tenure, etc. are not important.
To this we say, they are important but not as much.
Why, you may wonder?
This is because you can choose to negotiate better rates, amounts, tenures with the same bank or a different bank once the initial loan is approved – all at your own pace – after the child has gone to college and started her classes.
At that stage, you will have enough time to find out all the details you want. And since you have time to think and make the right choice, you will make a better long-term decision.
You may even choose to pay back the earlier education loan as you take another one that meets all your requirements from loan amount and interest rates to tenure and EMI.
Yes, certain things may be important to consider such as the overall interest outgo but if you plan it right with our help or by yourselves you will be able to save considerably plus get all the benefits such a loan can bring.
What you need to do
You need to think smart and decide what’s good for you and your family.
We suggest choosing a bank or financial institution (NBFC) that you are familiar with or from whom someone you know has taken an education loan. But checking out what they offer and comparing different banks or NBFCs are must-do items before you apply.
You will be paying a considerable amount of interest and may even have to put up security for the loan. The bank will protect itself through its numerous rules and terms and conditions. You have to act similarly.
Look and compare the different study loan products. Talk to your bank. You do not owe anyone a single paisa even if they are your bankers for decades. No one will give you an interest free loan. So, take it upon yourself to choose the best for yourself and your family.
Also, remember a small thing everyone forgets. Your time is money. A bank that expects you to show up and then does not attend to you is not one you should go with for the study loan.
And if that is how your bank has treated you for some time now, maybe you need to move your accounts to another one that appreciates your business.
There is another small thing you need to do. There are certain loans that do not need any security as they are not for a large amount but they need a guarantor to sign the loan application along with you. If you need a guarantor, seek out somebody who you know will not have any problems signing the papers. Usually an aunt or an uncle, a cousin or a friend can do it for you but remember to be direct about it while asking the person. And don’t mind if they say no. Not everyone is comfortable being a guarantor.
How to apply?
This is what you need to do to get the right education loan.
We are breaking it up into steps that are spread across a few days.
On the first day, read up everything you can find or have the time for on education loans.
On the second day, re-read the schemes of different banks or NBFCs you like and give them a call.
Find out details such as maximum loan amount that you are eligible for, the interest rate you are likely to get, the tenure you may opt for, any fees and processing charges, the documents you will need and any other important matters that they specifically mention.
Always ask if there is anything you ought to know and which they have not mentioned. And if they do not mention it, ask them if they need any affidavits, notarized papers or documents signed by approved authority for the purpose of the loan
After you have the options in front of you, discuss with your family members or someone who can give you sound advice. Then decide on the banks/NBFCs that you will approach. We suggest you shortlist at least 2-3 banks/NBFCs so you have options.
On the third day, get all the documents ready. Confirm the documents with the bank or NBFC that is your first choice.
On the fourth day, go early to the nearest branch of that bank/NBFC and put in the application. If the loan has to have joint applicants and/or guarantor, everyone who needs to sign should go. Or else it will be another trip.
What Documents Do You Need?
The documents you need for an education loan are fairly standard but some banks may ask for something that will take some time or effort to procure.
The list of standard documents you will need are:
- Application Form duly filled and signed by applicant and/or guarantor along with details of applicant and/or guarantor and family
- Two Passport Size Photographs of student, applicant and/or guarantor
- Photocopy of PAN Card of the student
- Personal Identification Proofs (Any One): Electoral I-Card, Passport, Driving License, PAN Card or Aadhaar Card
- Residential Address Proof (Any One): Electricity Bill, Landline Telephone Bill, Electoral or Voter ID Card or Passport. Sometimes Aadhaar works for both ID and residential proof. Ask the bank
- Admission Letter, Course Details and Prospectus
- Fee Details with Demand of Fee by the Institution
- All Proofs of Past Academic Record including Mark Sheets and Certificates. If it is for a graduate degree, take everything from Class 10 onwards
- Copy of Passport if the loan is for overseas study
- An Income Certificate from a Competent Authority to avail the interest subsidy under Central Interest Subsidy Scheme of Education Loans, if eligible
- An Income Certificate and/or a Minority Certificate from a Competent Authority to avail any interest subsidy under Padho Pardesh Scheme for Interest Subsidy on Educational Loan for Overseas Studies for Minority Communities, if eligible
- An Income Certificate and/or a Minority Certificate from a Competent Authority to avail the interest subsidy under Dr. Ambedkar Central Sector Scheme of Interest Subsidy on Educational Loan for Overseas Studies for OBCs & EBCs, if eligible
- Property or other security documents wherever applicable
- Cheque for processing charges, if any
- Affidavits or letters from competent authorities on any matter, if needed
How to Use the Education Loan to Your Advantage
Understanding the importance of education and to give relief to students, the Government of India provides relief on the interest component of an education loan.
The relief is provided under section 80E of the Indian Income Tax Act, 1961.
Here are the key points to keep in mind.
#1: Only interest allowed
The relief is on the interest component of the EMI, and there is no cap on the maximum eligibility. However, you need to obtain a certificate that provides the EMI breakups from the Bank
#2: Only for individuals
The deduction is available for individuals and not HUFs or other types of taxpayers
#3: Loan only for self, family or legal wards
The loan should have been taken for self, spouse, child or for a child for whom the tax payer acts as a legal guardian
#4: Only allowed for studies after Class 12
The loan should be for higher studies after passing Class 12 or its equivalent under different education boards such as state boards, CBSC, ISCE, etc. Both regular and vocational courses are eligible
#5: Loans from family or relatives not eligible for deduction
Eligible education loans include those taken from banks, NBFCs and approved charitable institutions. Any loan from a family member or relative does not count
#6: Maximum deduction is for 8 years
The deduction is only available for 8 years, starting from the year in which the repayment starts, or up to the time when interest is fully paid off, whichever is earlier.
Let us explain this with two examples:
Example 1: Suppose you take an education loan that needs to be repaid in 8 years but the bank or NBFC charges the interest up to the 6th year only. In this case, you are eligible for section 80E deduction up to the 6th year only and not the full term as the EMI in last two years will only comprise of the principal component.
Example 2: Suppose you take an education loan that needs to be repaid in 10 years and the bank or NBFC charges the interest up to 10 years. In this case, you are eligible for section 80E deduction up to the 8th year only and not the full term even though the EMI in last two years will have an interest component.
How to Pay Off an Education Loan Easily
The burden of an education loan can be immense even if there is a tax break on the interest.
However, there are ways you can reduce the burden. Here are some ways to go about it.
Road #1 to reduce burden: Pay the interest during the moratorium
Most banks do not ask you to pay the interest during the moratorium period, which is usually the duration of the course and 6 months to a year after that. If you choose to pay the interest during this time, the bank usually reduces the interest rate by 1%.
Road #2 to reduce burden: Have a maximum tenure of 8 years for the loan
The maximum time for which you can avail section 80E deductions is 8 years. If you can pay off the loan within 8 years, you will likely get tax breaks on all the interest you have paid.
Road #3 to reduce burden: Apply for scholarships
The lesser loan amount you take, the better it is for you. So, apply for as many scholarships as possible. Some colleges and universities hold tests that waive off a considerable chunk of the college fees, if not all. Even reducing your fees by 10% saves a lot.
Would you like more information? If yes, please email [email protected] and we will try to help.