How An Education Loan Can Empower You

Time to read: 5 mins | December 11, 2017

Since childhood, it has been strongly ingrained in us that education is everything! Every parent wishes to provide their child with good education so they can have the best opportunities in life (a well-paying job, dream house, car ––a well-settled life). It is believed that better education opens doors to a good life.

In a time where the entire world is becoming a knowledge-based economy, nobody can deny the importance of quality education. And gen Y and the millennials do recognise this. Most have aspirations to acquire a quality education to be future ready.

Benjamin Franklin (the founding father of the United States of America, renowned polymath, author, political theorist), aptly said, "An investment in knowledge pays the best interest."

Quality education can truly empower us; but it is no longer cheap. Plus, the ancillary expenses, viz. coaching class fees, uniform, accommodation (for pursuing education in another city/state/country), etc. have increased. Thus, overall quality education has become dearer. Parents are saving and investing wisely in the endeavour to provide best education to their children (within their means). But many a times, the wealth generation is inadequate to counter spiralling education inflation. And here’s where an education loan serves as a great aid.

Axis Bank India offers education loans at attractive interest rates for a loan amount ranging from Rs 50,000 to Rs 75 lakh. The education loan is available for career-oriented course such like medicine, engineering, management, etc. either at a graduate or post-graduate level in prime institutes in India and abroad. The loan covers tuition fees, examination fees, library subscription, cost of books, needed lab tools/equipment, laptop/computer, hostel charges (if any), and so on.

Who is eligible for an education loan?

Students can directly apply for an education loan. However, their parent(s) or guardian will be treated as co-applicants, and their role will be akin to a primary debtor (a person who owes money).

While the eligibility criteria differ across banks, the basics are as follows:

• Indian citizens and NRIs both can apply, but a resident Indian co-applicant is mandatory for the latter
• Applicant can be below 18yrs of age , co-applicant will sign the application form and loan agreement in the capacity of a legal guardian.
• You need to have secured certain marks during SSC, HSC, and graduation
• Some banks even require the applicant to have cleared a certain national level entrance examination
• The co-applicant, i.e. parent(s) or guardian, need to have a regular source of income
• A confirmed admission from a recognised college/education institution (as per bank’s list) is a must

As regards to the documentation, the following need to be submitted along with the education application form:

• Income statements (Salary slip, Form 16, Income-Tax Returns of the last 2 years and Computation of income of last 2 years certified by a Chartered Accountant)
• Bank Statement/Pass Book of last 6 months
• Copy of the admission letter of the Institute along with the ‘fee schedule’
• Mark sheets and/or pass certificates of SSC, HSC, Degree Courses, National level entrance test
• Age proof (birth certificate, passport, Aadhaar, PAN card, driving license)
• Address proof (Aadhaar, passport, latest electricity bill, latest telephone bill, ration card, existing house lease agreement, bank account statement)
• Photo identification proofs (Aadhaar, voter id, PAN card, passport, driving license)
• Passport size photos of the applicant and co-applicants
• Guarantor form (optional)

Usually, education loans below Rs 4.0 lakh do not require a guarantor, but varies on a case-to-case basis. However, the bank may insist on a collateral security like an insurance policy and tangible collateral security (in the form of fixed deposits, shares, real estate etc.). For an education loan amount ranging between Rs 4.0 lakh and Rs 7.5 lakh, apart from co-applicant(s), a third party guarantee is needed from a person who is not a blood-relation (an acquaintance, friend, or any other relative). This adds a further layer of security for the bank in case co-applicant(s) / second-person guarantee fail/s to repay. For education loans above Rs 7.5 lakh, banks insist on tangible collateral security of a suitable value.

After a through due diligence, the bank sanctions the education loan. Once the loan is sanctioned, before disbursement, the loan agreement copy (which includes Demand Promissory Note, DP Note Delivery-cum-Waiver Letter, Standing Instruction Request, PDC (Post-dated Cheque) Cover letter, Affidavit, Deed Of Guarantee, Indemnity Bond, Disbursement Request Form) needs to be duly signed by the borrower, co-applicant(s) and guarantors. The disbursements can be done in full or in suitable instalments as per your requirements/fee schedule.

In the entire process, if co-applicant(s)——parent(s) or guardian——have a good credit history, can expect faster loan disbursal. Plus, the best interest rate can be obtained and/or even reduction or waiver of certain charges levied.

For the economically weaker sections of the society, there’s an Interest Subsidy Scheme from the Government of India. The Scheme provide full interest subsidy during the moratorium period, i.e. Course Period plus one year or six months after getting job, whichever is earlier. The Scheme can be availed of if the annual parental income from all sources is upto and inclusive of Rs 4.5 lakh. Moreover, the Scheme is available only for studies in India, and for education loans upto and inclusive of Rs 10 lakh.

If you wish to get a broad sense of how much the EMI on an education loan would be, Axis Bank’s education loan EMI calculator is a great resource. All you have to do is input the relevant data in the required fields.

What are the factors to look at?

• List of eligible institutes
  When you approach a bank for an education loan, first check whether the university/institute is accredited by the Ministry of HRD and administered by the Ministry of Tourism. Moreover, is the university/institute eligible for Central Government’s Interest Subsidy Scheme.
• Interest rate
  The interest rate determines your EMI and has a bearing on your budget and long-term financial wellbeing. So, make sure you’re availing a loan at a competitive rate of interest. It makes sense to compare interest rates across lenders.
• The charges levied
  Most banks, including Axis Bank, do not levy a processing fee for an education loan. However, you need to keep an eye on other charges such as prepayment charges, late payment charges, penal interest, and so on.
  Please note, Axis Bank, does not penalise you for prepayments; but for late payments interest @2% per month (i.e. 24% p.a.) is levied on overdue instalments. Further for a PDC bounce, Rs 500 plus applicable GST (Goods & Service Tax), per instance.
• Loan Tenure
  The maximum tenure for an education loan is usually 5 to 7 years (including moratorium period). However, as per the guidelines the loan tenure can be extended up to 10 years for loans up to Rs 7.5 lakh, and 15 years for a loan amount above Rs 7.5 lakh. Remember, a higher tenure can reduce your EMIs, making repayments comfortable; while opting for a lower tenure increases your EMI.
• Customer service
  Ensure the customer service at the lender has high standards. This service can even help keep track of your loan, allow you to be in better control of your personal finances.
  Remember, while lenders will have varying customer service standards, there are some basics of good service that are universal.
• Terms & conditions
  Take the time to read the terms & condition carefully, and make an informed choice. This will avoid issues later and ensure a pleasant, hassle-free experience.

Availing an education loan carries the following benefits:

• Your existing finances are not exhausted and the loan can be worked out to suit your budget, facilitating you to save.
• You don’t have to utilise your existing investments assigned for other important financial goals such children’s marriage needs, your own retirement, among a host of others.
• Tax benefit: The interest paid on education loan is allowed as deduction under Section 80E of the Income-Tax Act, 1961, provided the loan is taken for higher education, irrespective of whether it is in India or abroad. The deduction is available for vocational as well as regular courses. To claim the deduction, ensure you obtain the interest certificate from the bank/ lending institution. While there is no limit on the maximum amount that is allowed as deduction, the total interest paid is allowed as a deduction. The deduction is available for a maximum of 8 years or till the interest is paid, whichever is earlier. So to simplify it further, the deduction is available from the year in which you start paying the interest on the loan, and the seven immediately succeeding financial years or until the interest is paid in full, whichever is earlier. It is vital to note that a deduction can be claimed only if the loan has been taken from a bank, approved financial institution or an approved charitable institution.

Remember, education is a long-term personal investment which can truly transform and empower individuals.

"Education is the most powerful weapon which you can use to change the world." - Nelson Mandela (an anti-apartheid revolutionary and politician)

So, do consider an education loan; it can be efficient way to finance your or your children’s education.

Happy banking!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.