(This article envisages what are the expenses considered for the loan, what will be the quantum of loan and margin, what will be the repayment/holiday, moratorium period, what type of security to be offered, what is a capability certificate, significant tax benefits, etc. )
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Education loan scheme is formulated by banks under the directions of RBI/Government, to help the needy students. Aware of significant benefits from education loan scheme, millions of students approaching banks for education loan every year. Besides financial assistance from banks for pursuing higher education, the education loan borrowers are benefitted by deductions under income tax acts for interest paid on education loan. Further, simple interest charged on loan amount during the study period and up to the commencement of repayment of the loan. Banks allow 1% interest concession if interest is serviced during the study period and subsequent moratorium period prior to the commencement of repayment.
Income tax benefits
An individual can claim an income tax deduction on interest paid on education loan availed for self, spouse or his/her children u/s 80 E of I.T. Act. The guardian appointed by the court for a minor student is also eligible for an income tax deduction on interest paid on education loans under the same section. One more benefit is that there is no upper limit for claiming deduction either on the amount of interest paid or the rate of interest paid. The deduction can be claimed up to 8 years or closure of the loan whichever is earlier. If the interest is paid during the moratorium period, the time limit of 8 years begins from the date of the first repayment of interest on the loan. However, the tax benefit is restricted for education loans availed from the bank, notified financial or charitable institutions. The education loan availed from the employer, family, and friends does not come u/s 80E. The deduction under section 80E is also allowed for education loans availed for studies abroad.
Who is eligible for an education loan?
Students of Indian nationals from all fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so. The education loan can be availed by students who get admission to higher education either in India or abroad. The existence of an earlier education loan to the brother(s) and/or sister(s) will not affect the eligibility of another meritorious student from the same family obtaining the loan under the education loan scheme. There is no specific restriction with regard to the age of the student to be eligible for an education loan. However, if the student was a minor while the parent executed documents for the loan, the bank will ask a letter of ratification from him/her upon attaining majority
Which are the approved courses for education loans?
There are many approved courses eligible for education loans. The degrees or diplomas conducted by recognized colleges/ universities recognized by UGC/ Govt./ AICTE/ AIBMS/ ICMR/ ICWA/ CA/ CFA IIMs/ IITs/ IISc/ XLRI/ NIFT/NID are eligible for education loans by the commercial banks. The other regular Degree/Diploma courses like Aeronautical, pilot training, shipping, degree/diploma in nursing or any other discipline approved by Director General of Civil Aviation/Shipping/Indian Nursing Council or any other regulatory body as the case may be are also eligible for education loans if the course is pursued in India. The admission to the above institutions ought to be through the entrance test or merit-based selection after completion of HSC (10 plus 2 or equivalent). However, entrance test or selection entirely based on marks obtained in qualifying examination may not be the norm for admission to some of the postgraduate courses or research programs. In such cases, banks may accept appropriate criteria based on the employability and reputation of the institution concerned. Students, who qualify for a seat under merit quota, can be considered for education loan to pursue a course under Management Quota. However, the implementing bank will have their discretion in the matter.
Banks also lend to students under the education loan scheme for studies abroad. The courses like MCA/MBA/MS/CIMA-London/CPA in the US have approved courses offered by reputed universities abroad. The Degree/diploma courses like aeronautical, pilot training, shipping, etc., can be pursued abroad, provided these are recognized by competent regulatory bodies in India/abroad.
What is the quantum of finance available from banks?
Need-based finance will be provided by the banks depending upon the repayment capacity assessed by the bank after the student getting job and margin brought by the student to meet the expenses. In any case, the loan will not exceed ₹ 10 lakhs for studies in India and ₹ 20 lakhs for studies abroad, for treating the loan as priority sector lending. Banks may consider the higher quantum of the loan on course to course basis (eg: courses in IIMs, ISB, etc). It may also be noted that even loans in excess of ₹10 lakhs qualify for interest subsidy under Central Sector Interest Subsidy Scheme, for loan amount up to ₹10 lakhs.
In terms of education loan schemes, banks do not stipulate margin condition for loan sanctioned up to ₹ 4 lakhs. However, a minimum of 5% and 15% margin will be respectively asked for studies in India and abroad. The margin may be brought in on the year-to-year basis as and when disbursements are made on a pro-rata basis. Scholarship assistance received by the candidate may be included as a margin.
Which are the expenses considered for the sanction of loans?
The expenses of the student during his/her study period like tuition fee, hostel fee, Examination fee, Library fee, Laboratory fee, Travel expenses, passage money for studies abroad, the Insurance premium for student borrower, Caution deposit, Building fund, refundable deposit supported by Institution bills/receipts, Purchase of books, equipment, instruments, uniforms, Purchase of the computer at a reasonable cost, if required for completion of the course and any other expense required to complete the course – like study tours, project work, thesis, etc., are considered for education loan. For those students who got admission for courses under Management quota seats, expenses considered as per fees approved by the State Government/Government approved regulatory body. Many banks consider loan amounts for reasonable lodging and boarding charges not exceeding 10% of the total tuition fees for the entire course.
What security to be offered for education loans?
Under the education loan scheme, banks do not demand security for loans up to ₹ 4 lakhs but parents/guardians shall stand as joint borrower(s) with the student. In the case of a married person, the joint borrower can be the spouse or the parent(s)/parents-in-law. For, loans sanctioned between ₹ 4 lakh and ₹ 7.5 lakhs, banks third-party guarantee is required, in addition to the joint borrower (s) with the student. The banks at their discretion, in exceptional cases, may waive third party guarantee if they are satisfied with the net-worth/means of parent/s who would be executing the document as joint borrower(s). For loan amount above Rs. 7.5 lakhs, in addition to above conditions like the parent(s)/ guardian to be joint borrower(s) with the student, banks insist tangible collateral security of suitable value acceptable to the bank, along with the assignment of future income of the student for repayment of loan installments. The security can be in the form of land/ building/ Govt. securities/ Public Sector Bonds/Units of UTI, NSC, KVP, etc. Life insurance policies, gold, shares, mutual fund units, debentures, bank deposits, or any other security in the name of student/ parent/ guardian / any other third party can also be offered as security. The security norms are uniform for all the banks.
What will be the Repayment/ holiday/Moratorium Period?
Education loan availed by the students shall be repaid after course period+1 year or 6 months after getting the job, whichever is earlier. If the student is not able to complete the course within the scheduled time; the extension of time for the completion of course; maybe permitted for a maximum period of 2 years. Interest servicing of interest during the study period and the moratorium period is optional for students. As per existing norms, banks allow 1% interest concession, if interest is serviced during the study period and subsequent moratorium period prior to the commencement of repayment. Accrued interest will be added to the principal amount borrowed while fixing EMI for repayment. In case the student discontinues the course midway, an appropriate repayment schedule will be worked out by the bank in consultation with the student/parent. The education availed up to ₹7.5 lakhs shall be repaid within a maximum repayment period of 10 years. For loans beyond ₹7.5 lakhs, the repayment period can be extended up to 15 years. Banks may consider top-up loans to students pursuing further studies within the overall eligibility limit, if such further studies are commenced during the moratorium period of the first loan, the repayment of the loan will commence after the completion of the second course and further moratorium period.
What is a Capability Certificate and to whom banks issue such certificate?
Some of the foreign universities need the students to submit a certificate from their bankers about the sponsors’ solvency/ financial capability, with a view of ensuring the sponsors of the students going abroad for higher studies are capable of meeting the expenses till completion of studies.
Banks issue such capability certificate for students going abroad for higher studies, after assessment of their financial capability based on supporting documents submitted to the bank.