The education of their children is a critical goal for almost all Indian parents.
However, while providing the best education is priority, not many parents may actually be able to meet this goal.
This is because the cost of education has been spiralling over the years, with education inflation pegged at a whopping 10%. Starting to save early is critical. If parents start to save for their child’s education immediately after the birth of the child, they would have 18 years to save for graduation and 21 for higher studies.
To accumulate Rs 1 crore, you need to start early
Amount to be saved per month will zoom with delay.
|Years to Invest||Investment needed per month (Rs)|
Assuming annualised return of 12%
However, despite starting early, one can still fall short of the required corpus. This is where Education Loans come in. As a parent, you should not baulk at the idea of taking this loan because not only does it help to upskill a child, it also comes with attractive tax benefits. In this week’s cover story, we will look at why an education loan makes sense today, what you need to consider while taking such a loan and the pitfalls to watch out for.
Bridge the shortfall
Spiralling costs is not the only reason why parents may fail to accumulate adequate money for their children’s education. A shortfall can occur because of a change in the nature of the goal. For instance, you may have budgeted for sending your child to one of the best institutes of higher learning in India, only to have your child opting for higher studies abroad. However, this possible shortfall is no excuse for not planning early. An existing education corpus makes it easy to get an Education Loan.
The shortfall may also be due to the other expenses you did not foresee at the time of planning. For instance, most parents consider tuition fees, exam fees and hostel expenses while planning, but tend to forget about living expenses and the like. If the child goes to study abroad, the living expenses would be steep. Since no financial institution will fund these post-course expenses, parents must keep aside a part of the savings to fund these, while relying on the Education Loan to meet the cost of tuition fees.
Repaying an Education Loan at the start of their career is a good way to instil financial discipline in young people. Since taking an education loan and repaying it on time also helps to establish credit scores, several parents, even those who can pay, insist upon their children taking this route. “The loan repayment responsibilities are being seen by numerous parents as an opportunity to inculcate the habit of financial discipline in their children and to help them build their own credit history,” says Arijit Sanyal, CEO, HDFC Credila.
What to look for
This is the most important factor when it comes to choosing any loan and an Education Loan is no exception. Education Loans in India don’t come cheap However, banks reduce the interest by 1% if the interest is paid while the child is studying and the loan is repaid without any default thereafter. Students getting into prestigious foreign universities also have the option of loans from foreign institutions.
Since defaults are common, public sector banks usually insist on collateral for loans above Rs.7.5 Lakhs. Though several financial institutions provide education loans without collateral or mortgage, it is better to provide one to reduce interest costs. Accepted collaterals include a house, a plot or fixed deposits.
3. Co-borrower or Guarantor
As a standard practice, most financial institutions insist on a parent or guardian as the co-borrower/guarantor. The number of years of service of parents plays an important role here.
4. Margin Money
Check how much the financial institution will fund and how much you need to put in. Your contribution is known as the Margin Money. This requirement varies depending on the lending institution, amount of loan and place of study. For example, PSU banks usually charge 5% margin for loans above Rs.4 Lakhs for students studying at Indian institutes and 15% for studies abroad. Private players, on the other hand, are ready to fund without any margin requirements. However, make sure that you don’t pay higher interest just to avoid paying the margin.
Unlike other loans, EMIs don’t start immediately for Educational Loans. In addition to the course period, there will another Moratorium Period for looking for a job. This Moratorium Period usually varies between 6 and 12 months. If the parent pays interest during the course period and Moratorium Period, the EMI will be based on principal only. If the borrower decides not to pay interest, the same will be accumulated and EMI will be based on loan plus accumulated interest.
This is one area of an Education Loan that has seen a sea change over the years. The maximum duration institutions used to give loans for was 7 years, which has now been extended to 15 years. This has meant a reduced EMI. In other words, the child will be able to service the loan it even if the initial salary is low. Since there is no prepayment penalty, it is better to opt for the longest possible duration. However, some prefer to close the loan as quickly as possible.
The documentation is similar to that of other loans. On an average, a credit score above 700 is considered good. The lenders will also insist on admission related documents. Papers related to the collateral will also need to be submitted. For example, if you are pledging your flat in a housing society, you need to submit documents like Share Certificate, Original Sale Deed, No Objection Certificate (NOC) from the society, etc.
This is critical because most institutes will not give too much time to secure admission. This means, you need to start the process a early. Taking pre-approval and keeping the tentative loan ready is one way to speed up the process. Several foreign institutes insist you demonstrate the ability to pay fees and pre-approved letters come in handy then. However, the final disbursement happens only after your ward gets confirmed admission.
Most universities offer scholarships for deserving candidates. It is important for students to explore such options before opting for a loan. Most foreign universities allow postgraduate students to take up campus jobs and this can take care of a major portion of living expenses.