Why Education loan?
Most of us feel that going for education loan is a bad idea. Yes, it is always nice, if you can fund the children education fully out of your own savings. But the sky rocketing educational expenses and the scope of getting an easy loan with income tax benefits made this loan popular.
Switch your investments in equity/equity mutual funds to safe debt products atleast 3 years before the child’s admission. There is nothing wrong in going for an education loan to bridge the gap between your savings and the actual cost of education. This loan will also bring in financial discipline into the child from the young age. It should be planned in such a way that the loan should not become a burden to the child in the initial years of his career.
How to go about?
First of all, you have to identify the field, where your child is showing interest. Then you have to identify courses within that field. If you are looking for an overseas education, check up regarding the recognition of the course, fee structure, etc. You have to analyse the cost of living in such locations. Cost of living is very high in places like US. Recent Rupee depreciation will add to your worries, if you have to pay in Dollars. It is better to avail the services of an educational consultant in such cases.
In the case of a course within the country, you may check up with the alumni regarding the placement track record, starting salary range, hiring companies etc. Please check whether the placement record justifies the fee structure of the course. Selecting the right course is very important here because some institutions enjoy preferential treatment with regards to educational loan. Some banks are not insisting on any security for loans, if the child is going to IIMs/IITs etc.
If the loan amount is less than 4 Lakhs, banks don’t ask for any margin money. In other cases, they will ask for 5% margin money (15% in case of foreign study). While raising margin money, if you fall short, liquidate some investments, where the return is less than the interest on education loan.
Also, get a copy of your Credit report – Most banks are reviewing your CIBIL report before the sanction of any loan!
Public sector banks are dominating the education loan business in our country. The interest rate varies from 12.5% to 15% depending on the quantum of loan and your credit record. Some banks offer a small discount to female students.
Select the best lender
It is always better to go for a lender which offers the lowest interest rate. You can first try out with the bank, where you are already having an account. You can compare the rates from many lenders and then finalise the best one. Please opt for a lender where there is no prepayment penalty, if you want to preclose the loan.
How to repay the loan
If you can manage, it is better to pay the interest on loan during the moratorium period. This will allow you to avail a 1% discount in interest rate on the loan. Also you can claim tax deduction for the entire interest paid on education loan. Once the child starts repayment, he can claim tax deduction on the entire interest paid. Normally the term of the loan is 7 years. The child can also prepay the loan from his annual bonus etc, if he wants to close the loan early.
Beware of Credit Bureaus
With the evolution of credit bureaus, it is necessary to maintain prompt repayment of any loan. Please note that the repayment history of each of your installments are tracked and recorded by such bureaus. A prompt repayment history will help the child in creating a good credit score at a younger age. This will help him in getting further loans like housing loan, car loan etc. at attractive rates. But be careful, in case of defaults, your child will find it difficult for future loans in life!
Don’t use your retirement savings for children education
If you use your retirement savings for the child’s education now, in all probability you will fall short of the required amount at the time of retirement. Then your child might have to bear the additional burden at that time. In effect, you will be helping him now only to complicate his finances at a later date. Also please note that there is no ‘Retirement Loan’ at that time like Education loan.
Go for that dream course
So, don’t worry about the fee for that dream course for your child. Let him go for that with an education loan and let him shape up his career, as per his choice. But be prompt in repaying the loan without any default.