Processing of Education Loan

Education is the essence of life. Government of India is promoting education loans so that no deserving student is denied education. Student who has secured admission in any institute of repute, whose degree/diploma is recognized by University/Institute affiliated to any Central/State Statutory Body or recognized by AICTE (All India Council of Technical Education) and other institutes of repute, is eligible for educational loan.

Banks give loans for paying fees of colleges, school, hostel, laboratory fees, buying equipments, purchasing books, to meet other course related expenses, etc.

While processing the loan application bank takes into consideration the tenure of the course, fees, other course related expenses and course material, for fixing the loan amount to be sanctioned.

At the time of loan processing bank can decide to disburse the loan directly to the college/institute depending on the fee schedule of the college/institute. The institute may be in abroad the bank will pay the fees in dollars or any other currency to the institute directly. The bank charges remittance fees for this.

Students don’t have to start repaying loan amount immediately as done in the other loans. Generally repayment of loan commences 1 year after the completion of course or 6 months after securing a job, whichever is earlier. In some cases where courses have long duration the loan can be availed for long tenures of up to 7 years. The repayment tenure also includes the moratorium period. Now days most of the banks offer hassle free services and loans are being approved speedily.

The student who has taken loan also has the discretion for the repayment of the loan. If the student is coming from the family which is financially sound then the installments of the loan can be repaid while completing the course then his/her parents can pay the loan. But this has to be finalized with the bank during the processing of the loan. Then there is an option of repaying the loan after completing the course, this is given by the bank.

Let’s see how the loan is processed.

If you have taken a loan of Rs 5lac for 7 years and the interest rate is 13.25 per cent a year. After you have completed the course, you take up a job and get a package of Rs 5lac a year. The EMI amount of the loan will be Rs 9,164, annually it would come out to be Rs 109,968.

Therefore in the first year of repayment, the interest calculated will be Rs 64,350, this can be deducted from the income while calculating tax. Hence you will save Rs 21,872. Thus the effective interest rate will stand around 10.75 per cent (instead of 13.25 per cent) for that particular year.

In case at the time of finalizing the loan repayment you accept moratorium on payment of interest then you don’t have to pay anything till six months after the course is complete, or you get a job (whichever is earlier). In this case the interest is compounded quarterly and added to the principal sum for repayment. The interest rate will be higher but this can be helpful for those who cannot repay the loan during the course period.

For education loan banks do not charge prepayment penalty, as in case of other loans. If you are capable to prepay in the early year of your career you can pay the entire outstanding loan amount without any penalty.

The most important thing to remember is the bank sanction loan according to the tenure of the course in case you are unable to complete the course you will have to start paying the EMIs immediately. You can consult your bank in such cases if they can give you a grace period either to continue your studies or to start repaying the loan, but you have to take the final decision.