Saturday, September 12, 2009

Educational Loan - FAQs

As a part of the series of articles about higher studies, here is one with some information on educational loans.

Educational loans are available for higher education (full-time graduate or post-graduate course) in technology, engineering, architecture, medicine, management and applied or pure sciences, including mathematics and statistics. It is best to check with the bank you are interested in getting the loan from, if the course you are going in for is covered under their educational loans.

Who gives out such loans?
Most of the financial institutions and banks give out educational loans. However, it is the public sector banks that are at the forefront of such loans.

Who is eligible for the loan?
Only the individual opting for higher studies can go in for the loan.

What is covered under the loan?
• Tuition fees payable to college/school
• Examination / library / hostel charges
• Travel expenses
• Purchase of books /equipment /uniform
• Cost of two-wheelers (optional)

What is the maximum amount lent by the bank?
The amounts given by different banks vary. Typically, for studies within India, the maximum amount is between Rs. 7.5 lakh and Rs 10 lakh. For education abroad, the maximum loan amount is Rs. 15 lakh to Rs. 20 lakh.
However, many banks cap the maximum amount at Rs. 20 lakh.

What is the interest applicable on Educational loans?
Again, the interest rates vary from bank to bank and depend on the amount of the loan taken. Typically, interest rates on educational loans range between 11.25% and 13.5%.

Are there any other fees applicable while taking this loan?
Banks charge you processing fees for approving the loan and basically doing all the paperwork. These fees range between 2.25% and 2.50%.

Another charge or more appropriately expense that you would most probably need to bear is the margin amount. Normally, banks do not approve the loan that would cover the entire cost of your education. For example, for a loan of Rs. 10 lakh, the bank would approve only 80% or Rs. 8 lakh. The additional Rs. 2 lakh that you would have to raise from your own sources is called the margin amount.

What are the documents required while applying for the loan?
The required list of documents may vary from bank to bank.

The most common documents would be:
• Proof of admission (educational loan cannot be applied without proof that admission has been secured in the selected institution)
• Schedule of fees from the institution
• Mark sheet of the last qualifying examination
• Photographs

If the applicant is earning then:
• Bank account statement
• Income tax assessment order of last 2 years
• Proof of income
• Brief statement of assets/liabilities

Is there need to provide a guarantor or any other kind of security?
For smaller amounts of loans (amounts upto Rs. 4 lakh) banks do not ask for any guarantor or security. However, most banks ask for either a guarantor or for some kind of security such government securities, gold, shares, other investments etc.


When does an individual start repaying the loan, and how much time does he have to do it?
Most banks ask you to start paying off the loan either six months or one year (varies from bank to bank) after you complete the course or six months after you have secured a job, whichever happens first.

Again, depending on the bank, you get around 10 to 15 years to pay off the loan. It is important to remember that the higher the amount, the longer you get to repay. Of course it also depends on your income and how much you are willing to shell out towards this debt on a monthly basis.

Are there any tax benefits for educational loans?
Under Section 80 E of the Income Tax Act, you are eligible for rebate on the interest (not on the principal) you have paid on the loan. Moreover, the best part is that there is no limit to this amount. This deduction once applied only for self-education, but now this facility is extended for the education of relatives; relatives include only one's spouse and children.

This deduction is allowed for 7 years and the loan must be taken for higher education purposes only. Moreover, the loan has to be from a financial institution or a government approved charitable institution.

Germany-specific:
In the past, a DD of 7700 euro for covering living expenses was compulsory to get one's visa. Now with the introduction of tuition fees (500-600 euro per semester), the procedure is slightly different. More information at http://www.vfs-germany.co.in/

You will need the visa requirements and some additional information from the University's website about living expenses (cost of accommodation, standard of living etc.) when you apply for a loan. For example, if you are going to the University of Stuttgart, printing this page http://www.ia.uni-stuttgart.de/internat/practical/living/expenses/index.en.html would be a good idea.

Some tips:
  • It is easier to get a loan from the bank where you have had an account for years. In this case, the bank has an idea about your financial status and credibility
  • Hardly any bank would part with 4 lakhs without having a guarantor or showing proof of other investments. Start preparing for this as soon as you start applying.
  • Choosing Nationalised banks would prove beneficial to you in the long run w.r.t the interest rates. But be aware there is a lot of red tape involved and the process is slower than a snail. Start as soon as you get your admission letter.

About the Source:
This article is from the monthly newsletter (Vol 2, Issue 9) I receive from http://tkbalajilic.com/. Mr.Balaji is a development officer at LIC and I personally know him because of a few of my financial transactions with him. My only contribution to this post was the the Germany-specific information.

Disclaimer: Neither Mr.Balaji nor I can be held responsible if you do not do your homework. Like with all financial transactions, the more you know the better. So take this as a template and find out as much as you can from the bank before you proceed to transact.
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