All about Student loan

 

Higher education can entail expenses on travel and stay apart from course fees. A loan comes in handy for many looking for higher qualifications. This article explains how this works for students looking at financing further studies either here or abroad

   Education is a tool to find employment. Students with the right professional qualifications get employment before they finish college. These professional courses are expensive which many parents cannot afford. With expensive professional education becoming a mandatory meal ticket, a student loan seems the most effective way to help with higher education. Moreover, students are likely to be in a position to repay these loans over a period of time with the high salaries they would get immediately on qualification. Student loans are one of the fastest-growing retail banking products. Almost all public and private sector banks are offering student loans at attractive rates for meritorious and needy students for studying both here as well as abroad. 

   Banks typically prefer to finance students who opt for traditional courses. Management students are among the top choices for most banks. Technology students from the country's premier institutions, and medical and engineering college students can also get student loans from banks. 

   Student loans cover tuition fees, hostel fees, library charges, hostel charges, administrative charges, travel expenses, purchase of books/equipment/uniform etc. The amount of educational loans varies with different banks. Generally, the maximum limit granted is up to Rs 10 lakhs for studying here and a maximum of Rs 20 lakhs for studying abroad. Loans are given on interest rates ranging from 10.5 to 15 percent per annum. Some banks also give a choice between fixed and floating interest rates. Some banks charge interest on a daily or monthly reducing balance which works in favour of the borrower.

Eligibility    

To be eligible for a student loan the applicant should be a resident and must have secured admission to a professional/technical course through a selection process. For studies here banks lend up to Rs 4 lakhs without providing any security or margin. For a higher loan amount of say up to Rs 7.5 lakhs can be availed against a third-party guarantee. The third-party guarantee can come from a person standing guarantee for the full amount. This loan comes with a five percent margin (what this means is that five percent is deducted from the amount sanctioned as loan). 

   To study abroad, a higher loan amount of Rs 7 lakhs and above are usually sanctioned against fixed deposits, NSC certificates, or property worth the loan amount. Here, the margin amount is 15 percent. Further, if a loan below Rs 4 lakhs is charged at say 10.5 percent rate of interest, the interest on a loan over Rs 4 lakhs is usually charged one percent higher. The Reserve Bank of India (RBI) prescribes the specifics (amount, rate, repayment period) of education loans and the government provides a two percent subsidy on these loans to banks.

Repayment    

Ideally, a loan from a bank located close to place of study should be taken unless it concerns overseas studies. This facilitates easier access to funds. For courses where employment prospects are less (as per the bank's own evaluation), loans are sanctioned on the basis of the parents' income. 

   The Indian Banks' Association (IBA) has recently formed a working group to address the issue of student loans and the rising rate of default. The group has submitted its findings to the Reserve Bank of India and the main suggestion is to make it mandatory for parents or guardians, of the student borrowing the loan, to be co-borrowers, thereby making them liable for repayment. Loans are usually repaid through equated monthly installments (EMIs).

It generally commences after one year of the completion of course or six months after securing the job. The time period can vary depending on the policies of the bank.

Documents required for a student loan:

• Completed education loan application form

• Original mark sheets of last qualifying examination

• Proof of admission, scholarship, studentship etc

• Prospectus of the institute containing schedule of expenses for the specified course

• Passport size photographs

• Borrower's bank account statement for the last six months

• In case the borrower in an income tax payee, income tax assessment order of last two years

• Brief statement of assets and liabilities, and of the co-borrower, if any

• Proof of income (salary slips, Form 16 etc), if any

• Copies of foreign exchange permit, if applicable

Tax implications    

Under Section 80(e) of the existing Income Tax Act, a person can exempt the amount paid against the interest of an education loan - either for self, spouse or children - for eight years from the year he starts to repay the loan or for the duration the loan is in effect, whichever is lesser. 

   Most banks are vying with each other to aggressively market personal loans. The student loan segment is being viewed as a vast untapped potential. Almost every prominent bank in the country has a student loan scheme in some form. Banks are increasing the flexibility of this loan in terms of payback period to attract more students. Therefore, it makes sense for students perusing professional courses to opt for a student loan.