Consider all factors before taking this loan

The cost of higher education — medical, engineering and studying abroad or upskilling, has increased significantly. Because of this, obtaining higher education has become difficult for people. Education loans are a good means to finance these expenses. Taking an education loan is a life-changing decision, so it should not be taken lightly. Without caution and considering every aspect, taking a loan can become a headache.

Since COVID, there has been a rapid rise in education loans. According to Reserve Bank’s data, there has been an annual growth of 20.6% in education loans. until October FY24, it was worth 1,10,715 crore rupees. This growth in education loans is the highest in the last five years. During the financial year 2022-23, education loans worth 96,853 crore rupees were disbursed from April to October, marking a growth rate of 12.3%.

Amidst all this, it’s important to keep in mind some things so that these loans don’t become a headache for you. Before taking an education loan, students should estimate all kinds of expenses. Along with college or course fees, cover other expenses such as travel, cost of devices used for studying, living expenses, and study material expenses. For this, research must be done before taking the loan. Many banks offer online tools like the Student Loan Calculator, where the entire cost of education can be estimated.

Before taking the loan, students should study about the placement history of the institute where they want to take admission. Those taking loans should avoid keeping the repayment schedule too aggressive. Because if you don’t get a job or if the salary is not as expected, you will miss out on loan’s EMI. This can affect the credit score and create difficulties in taking loans in the future.  Keep the amount of the education loan as much as is really needed. Taking higher loan amount will result in higher EMIs and higher interest. Using an EMI calculator can help in making a better plan.

Not comparing offers of different banks can also lead to missing out on a good deal. For example, usually, the interest rates on loans from government banks are lower compared to private banks. The government introduced the Vidya Lakshmi portal for those interested in education loans. You can visit it on www.vidyalakshmi.co.in. By registering on it, you can find out the interest rates of different banks and apply. You can also talk to people who have already taken education loans.

For studying in India and abroad, you can get a maximum loan of up to 10 lakh and 20 lakh rupees, respectively. However, banks and NBFCs provide more loans for courses from prestigious institutions like IIMs and IITs. According to the website of Bank of Baroda, the repayment tenure for education loans is up to 15 years. For reputed institutions, there’s no need for any collateral for education loans up to 40 lakhs rupees.  The maximum limit for education loans from Bank of Baroda in India is 1.25 crore rupees for studying in India and 1.5 crore rupees for studying abroad. A guarantor is also required for sanction of the loan.

According to BankBazaar.com, State Bank of India offers education loans at an interest rate of 8.15 to 11.15%, while Bank of Baroda offers at 8.55 to 12.50%. Similarly, HDFC Bank’s education loan interest rate starts from 9.50%, while ICICI Bank’s interest rate ranges from 9.50% to 14.75%. Many banks also charge processing fees.

Signing loan documents without understanding the terms written in detail can be problematic. You should not only consider the interest rate but also understand how the interest is calculated.  Pay attention to other aspects like processing fees, repayment options, pre-payment penalties, and collateral requirements.

The repayment of education loans usually begins either 6 months after you secure a job or 1 year after the completion of the course. However, the interest starts accruing from the moment you submit college fees. It adds up to your principal amount. Therefore, starting to repay the loan as soon as possible without waiting for 6 months or a year can reduce debt burden. You need to maintain discipline in repaying the loan, you should make timely payments. Defaulting on loan repayment can result in hefty penalties. Debt burden can also increase significantly if you are unable to pay installments for a long time.

An education loan also saves taxes along with building your career. Deduction under Section 80E of the Income Tax Act is available on loans taken for higher education. The loan can be of your self, or your children, or even your spouse. This deduction is available on the interest of education loans, and there is no upper limit. However, this deduction is available only for the first 8 years from the EMI start. Therefore, the borrower should try to repay the loan within 8 years.