5 Things Every Parent Should Know While Applying For An Education Loan

Education from a renowned institute is often considered an important stepping stone, leading the way to a successful career. However, the cost of education is increasing rapidly and an education loan seems like a great option for parents and students who may be short on funds. In fact, given the strengthening of the dollar against the rupee, an education abroad has become phenomenally expensive as well. This trend also reflects in data from TransUnion CIBIL, where we have seen a 48% rise in the average ticket size of a newly-opened education loan going up from INR 5.73 lakhs in 2015 to INR 8.5 lakhs in 2018. 

If you are considering an education loan to help finance your child’s higher education, here are some things you should keep in mind, before you decide:

1. Assess and compare offers: Make sure you check with multiple lenders before you make your decision. Aggregator sites can help you compare interest rates across various banks and help you choose the best rate. Under the Pradhan Mantri Vidya Lakshmi scheme, the government also provides a support system through the Vidya Lakshmi portal, which lets students and parents view, apply and track the various education loan applications. This will help you select a loan that offers the best interest rates along with flexible repayment options.

2. Understand the lender’s collateral requirement before you apply for the loan: Lenders can provide 100% of the loan depending on the amount. As per RBI rules, margin money (self-finance) is required for the loan amount up to INR 4 lakh. If you are planning your child’s higher studies in India 5% of the money has to be self–financed and for an education abroad, the margin money is 15%.Banks do not ask for collateral if the amount is within INR 4 lakh. The need for a guarantor arises only when the amount is between INR 4 lakh to 7.5 lakh, and for funding above INR 7.5 lakh an asset needs to be pledged as a security to the bank, just in case the borrower fails to pay back the loan.

3. Maintain a good credit score: Generally, a parent or a guardian is the ‘guarantor’ when their child is applying for education loan. This is also the case if the student does not have a credit history and the lender requires a friend or a family member to be the guarantor of the loan. In cases like this, it is imperative that the guarantor should have a good credit score to ensure that the loan application is not denied. A credit score of 750+ can also help the applicant get better rates from the lender.

4. Plan your repayment strategy: Although the interest rate is accrued from the first month, in some cases students may be provided a grace period of one year before they start paying the loan amount — this is called the moratorium period. One of the benefits of this period is that while your child can pay the EMI after this grace period, you can start repaying the EMIs early and help your child complete the loan faster.

5. Additional benefits: Taking an education loan also has certain perks like a tax benefit. Under Section 80E of the IT Act, the borrower can claim deduction on the entire interest part of the loan. Taking an education loan also helps towards creating a positive credit footprint as, more often than not, this is a first loan taken by students.

Keep these points in mind, and you can easily plan your child’s education without a worry. Timely repayment of the education loan will eventually build a healthy credit profile, not only for your child but for you too.