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For Their Better Future

Business World Jun 23, 2015

Parents do whatever it takes to give their children a good life. Despite the high cost of education, they want the best. But only few can afford. For others, there’s education loan, writes Sunil Dhawan Parents always want the best for their kids. Especially, when it comes to education. Needless to say that the best comes at a price. Children bank upon their parents to fund their dreams. But, are parents ready? The cost of education, especially higher studies, is rapidly going up. It’s estimated that inflation in education is double that of general inflation, which presently is hovering around 6 per cent per annum. At any rate, an MBA course from a premier institute in India would cost in excess of Rs 15 lakh and a minimum of Rs 20 lakh outside India. Engineering courses cost between Rs 5 lakh and Rs 10 lakh, while a five-year course in medicine from a private college could set you back by up to Rs 50 lakh. Parents today are well aware of the sky-high costs of education and, therefore, invest in mutual funds, insurance and fixed deposits. But sometimes, all these investments put together can still be less than what is required. In such cases, there’s education loan. Where To Start The first step is to zero in on the course one wants to pursue. The next is clearing the entrance exams of institutes offering the course. And then comes funding. According to Ajay Bohora, co-founder and CEO of Credila Financial Services, an HDFC company, “Students and parents are advised to start planning and saving for education much in advance. So while preparing for entrance exams, it’s wise to also prepare for your funding options.” Most reputed institutes have tie-ups with banks offering educational loans. Banks have an approved list of courses and institutes for which loan approval is faster and even the terms and conditions are favourable for students. Typically, a loan issuer insists on four things when processing education loans: student’s academic profile, university and course, collateral and the co-borrower’s profile.   <img alt="" src="http://bw-image.s3.amazonaws.com/personal-loan-lrg.jpg" style="width: 490px; height: 354px;"> How The Loan Works   Unlike home, car or personal loan, education loan doesn’t need to be serviced from the very first month of its disbursement. The equated monthly instalment (EMI) in the case of education loan begins after the completion of the course and only when the student starts earning. According to Naveen Kukreja, managing director of loan comparison website Paisabazaar.com, “Typically, education loan lenders extend multiple repayment options, including repayment after ‘a moratorium period / holiday’ and a ‘step-up EMI’ under which the EMI increases as the years progress.”   The Moratorium What makes education loans unique is the moratorium period that stretches across the duration of the course. During this period, different issuers can structure the loan differently. For instance, in some cases, the moratorium is as long as the entire course period, which means no simple interest has to be paid during that time, while for other banks, the moratorium could only be on principal repayment and not simple interest. In the case of most banks, the moratorium can be extended up to 6-12 months even after the course ends. How Much Will The Bank Lend As per Indian Bank’s Association guidelines, the maximum loan for studies in India can go up to Rs 10 lakh, while for studies abroad up to Rs 20 lakh. The guidelines, however, allow banks to offer a higher amount depending on the course and the institute. Banks grade institutes on the basis of their reputation. The more premier the institute, the higher the grade and so is the loan amount that comes with a lower interest rate. The borrower should get an estimate from the bank on the EMI that has to be paid towards the loan when the course ends. Ideally, it should not be more than 25 per cent of students’ net take- home salary.   Collateral   Depending on the loan amount, banks can ask for collateral. Typically, for a loan of up to Rs 4 lakh, no collateral is required, but a co-borrower is needed; usually, parents become one. For loans between Rs 4 lakh and Rs 7.5 lakh, most banks make parents the co-borrower as well as ask for a third-party guarantee. And for loans above Rs 7.5 lakh, banks see collateral — property papers, post office savings products, life insurance policy, share or mutual funds and bank deposits amongst others — of equal value. Collaterals aren’t a must in all cases. A bank may have a maximum limit of Rs 30 lakh, but can ask for collateral for loans above Rs 20 lakh. Also, banks have different slabs for different institutes. For instance, State Bank of India can offer loans up to Rs 30 lakh without collateral in case of specific institutes. Will There Be Margin Money? In some cases, borrowers are asked to furnish margin money (for loans above Rs 4 lakh), which could be up to 5 per cent of loan amount for courses in India and up to 15 per cent for outside India. A few banks, however, provide 100 per cent funding. Says Bohora, “It’s important to see that the education loan covers the entire cost of attendance and not just the tuition fee. Most students end up spending a lot of money on entrance test preparations, application process related expenses, etc. Living costs in overseas destinations also add up quite a bit. It’s important to find a lender that doesn’t require any margin money.” When The Loan Has To Be Repaid Repayment has to be made within eight years of completion of the course. The simple interest payment is mostly made by parents who avail tax benefit on such payment under Section 80E of the Income Tax Act, 1961. Once, the moratorium ends, students can start paying EMIs. For tax benefit, there is no ceiling on the interest amount and such deduction from income can be availed for eight years. However, principal repayment doesn’t fetch any tax benefits. Interest Rate The interest rates for educational loans are floating. Every bank has its own base rate (BR) and the interest rate of education loan is linked to it. Typically, the interest rate is BR plus 1.5-3 per cent; it could be higher in case of a few banks and vary as per loan amount. Currently, the BR is around 10 per cent for most banks, which makes the interest rate for  education loans around 14 per cent. Vijaya Bank has a fixed rate of 11.75 per cent for students of premier institutions such as IIMs and IITs. Credila, according to Bohora, doesn’t follow the ‘one size fits all’ approach. “Parents’ background, employment track record, credit scores, academic record of students, country of study, the institute and the course being pursued, collateral security, etc., play an important role in defining the interest rate,” says Bohora. The Cost Of Loan There could be a loan processing fee of about 1-1.5 per cent of the loan amount depending on whether the course is in India or broad. Plus, there could be a pre-payment charge as well. So how long does it take for a loan to be sanctioned? Says Kukreja, “Dedicated education loan providers such as Credila and Avanse promise to disburse loans within 5-10 days of filing an application, while public sector banks can take close to 3-4 weeks for processing the loan. Disbursement of loan in case of foreign institutes can take time and hence, it is advisable for prospective students to apply for loan at least 5-6 weeks in advance.”  <table align="center" border="1" cellpadding="1" cellspacing="1" style="width: 600px;"><tbody><tr><td>LOAN HUNT If you are looking for a bank loan to fund your way to a B-school or an engineering degree, here is how you should go about it:</td></tr><tr><td><img alt="" src="http://bw-image.s3.amazonaws.com/loan-illustration-300.jpg" style="width: 300px; height: 232px; float: right; margin: 3px;">1. Get a fix on the course and the institute 2. Select 2-4 banks offering loan for the course. Look for banks with tieups with the institute 3. Evaluate on the basis of any preferential treatment for the course or institute in terms of interest rate or loan amount or collateral 4. Consider conditions for moratorium and provisions for grace period 5. Compare the processing fee, prepayment charges and other costs to see if they are on the higher side 6. Get an estimate of EMI from selected banks. Ideally, EMI should not be more than 25 per cent of your net take-home salary 7. You need a co-borrower. Spouse, siblings, parents or even parent-in law can be one. For loans between Rs 4 lakh and Rs 7.5 lakh, a third-party guarantor can be required 8. If the loan amount is high, make sure you have enough collateral to satisfy bank’s requirement</td></tr></tbody></table> Pitfalls Not all education loans qualify for tax benefits. To avail benefits under Section 80E, the loan has to be from an approved entity. Sometimes simple interest payments are ignored or are not paid to bank on time. Doing so disqualifies the borrower from getting the agreed 1 per cent concession on the rate of interest. Besides, the bank keeps adding the defaulted amount to the principal, which keeps growing until the repayment begins after the completion of the course. Avoiding such situations make the best out of the funding facility of banks. To avoid ending up with a bad loan or a lender, Kukreja suggests, “You must enquire about interest rates, tenure of loan, margin money, prepayment charges and processing fee that may be levied by banks. Take all expenses, including tuition fee and lodging expenses, into consideration, and quote the loan amount accordingly.”   Conclusion   A loan is a liability and hence, the co-borrower should get an insurance cover equal to the loan amount, preferably a pure-term insurance plan. The borrower should try to keep a healthy repayment record to ensure a high credit score so future requirements for debt do not get impacted. Taking an education loan to fulfil one’s dreams could also help students in learning the nuances of money. After all, it is the first loan for most.   sunil@businessworld.in (This story was published in BW | Businessworld Issue Dated 13-07-2015)