The benefits of taking an education loan and the need to strike a balance
Timely education loan repayments build the child’s credit history, and also imparts financial discipline in the child
Education is expensive, be it in India or overseas. However, as a parent, you are always in a quandary whether to tap into your savings or avail an education loan. In India, good quality higher education can cost anywhere from ₹10 lakh to ₹30 lakh, while sending your child overseas can cost at least ₹30 lakh.
For those who maintain significant fixed deposits, it’s an easy choice: to not take an education loan priced at, say, 13% and to re-allocate a portion of bank deposits (yielding 7% per annum) towards children’s education. For a vast majority, however, it isn’t quite so straightforward. Most have to disturb retirement or emergency funds or liquidate assets like real estate, equities and gold. So, it is important to be familiar with the available options.
Education loans or student loans are applied for by the student, along with her parent, guardian or a third-party guarantor. The purpose of the loan is to cover all expenses incurred while studying, which typically include admission, tuition, examination and library fees; boarding and lodging; cost of computers, books, and other equipment; travel expenses and health insurance.
At public sector banks, for a loan up to ₹4 lakh, parents serve as co-applicants; between ₹4 lakh and ₹7.5 lakh, parents are co-applicants and a third-party guarantor is also required; while for loans over ₹7.5 lakh, banks additionally ask for collateral. Women applicants are entitled to a 0.5% interest rate concession.
Being a priority sector lending, most banks and non-banking financial companies (NBFCs) are keen to disburse education loans but the loan application process, along with terms and conditions, vary between institutions. Some private banks and NBFCs offer a wide selection of high-ticket unsecured education loans for up to 15 years. Normal credit appraisal criteria notwithstanding, the maximum loan amount is predicated upon ranking of the college in which admission has been obtained.
Why choose an education loan
Protects savings: A student loan would obviate the need to disturb your own investment portfolio and help preserve your financial goals, including retirement plans.
Contingency: If unprecedented events prolong the course’s duration, your funds can be a back-up to safeguard your child’s education schedule.
Tax deduction on interest: Under Section 80E of the Income tax Act, you can claim unlimited tax deduction on interest paid for 8 years. There’s no tax benefit on principal repayments.
Moratorium on repayments: EMIs can be scheduled to commence 6-12 months after completion of the course. That can be a relief for young professionals.
Build credit history: Timely loan repayments build the child’s credit history and enhance her ability to access credit facilities in years to come.
Teach responsibility: Managing loan repayments will impart financial discipline in the child.
Alternate options: Education loan approvals are not a cakewalk. Student loan (unsecured) portfolios have not been performing as envisaged. Banks and NBFCs are facing high delinquencies. So, prepare for a robust evaluation process which could result in either rejection or downsizing of the loan. You can explore personal loan or loan against property too, but they have their own pros and cons (see graph).
When to use your own funds
For children’s education many of us have been regularly investing. Unless you are anticipating any other major call on your money, go with your own funds instead of creating the attendant stress of managing loan liability. Accordingly, at a rate of return of 10% or less, use own funds.
Both my children studied at American universities, and I went for a judicious mix of own and loan funds, retaining the option to react adroitly in any situation. For more funds, one could negotiate an increased loan amount and a longer tenor. If nothing came up, one could prepay the loan and rest easy. With the benefit of hindsight, I must confess that the combo route worked well.
Your own funds or loans or a combination, there is no one-size-fits-all. Assess your own priorities and personal financial landscape, and do seek professional advice, if necessary.
Raj Khosla is founder and managing director, MyMoneyMantra
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