Applying for Education Loan? - 5 Things Parent Should Know When Applying

In today’s highly competitive world, graduating from the renowned institute is considered a stepping stone towards accomplishing a rewarding career. However, in the purview of the rising cost of education, most parents prefer applying for an education loan to cover their child’s education fee. A study conducted by CIBIL suggests that the average size of the education loan has increased significantly from 5.73 lakhs in 2015 to 8.50 lakhs in 2018.It is no doubt that the education loan is a huge financial commitment, and as a parent, you would want to ensure that you get the best loan offer. Here are five critical things that you must consider while applying for a loan.

1. Compare the offers from different lenders W hen you are looking for a student education loan, it is paramount that you compare the offers from multiple lenders before you finally shortlist one and submit your student loan application.
   You can use various online comparison or aggregator websites to make a comparison. It would be best if you compared the offers based on the interest rate offered, the eligibility criteria, the time taken for approval, loan duration, moratorium period offered, flexibility in repayment, etc.
2. Know about the lender’s collateral requirements As per the Reserve Bank of India (RBI) directive, when you apply for an education loan, you must self-finance a part of the education fee. For a loan up to four lakh rupees, you must pay at least 5% of the costs from your pocket for studying in India, and if you are planning to send your child abroad for studies, you must self-finance 15% of the total fee.Generally, the lenders do not ask for collateral if the applied amount is equal to or less than Rs. 4 lakhs. For loans ranging from Rs. 4 lakhs to Rs. 7.5 lakhs, the lender may ask for a guarantor, and for loans above Rs. 7.5 lakhs, you must pledge an asset as security to the lender. Know the exact collateral requirement of the specific lender before you start the student loan application process.
3. Maintain a high credit score If you are applying for a student loan for your child, the lender would require you to act as a guarantor for the loan. Therefore, you must maintain a good credit score to showcase your creditworthiness to the lender. The minimum credit score requirement varies from lender to lender, but, generally, a credit score of 700 or more is considered an ideal score. If you have a high credit score, you can negotiate with the lender to get a loan at a better rate.
4. Have a repayment strategy in place In most cases, the lenders provide the students with a grace period of one year after the completion of the course before they start repaying the loan. This is called the moratorium period. One of the significant benefits of this period is that while your child starts repaying the loan after the grace period, it gives you plenty of time to plan your repayment well. You can use your surplus liquid cash to repay the loan even before the repayment period starts and help your child to repay the loan faster.
5. Avail the Tax Benefits Education loans offer tax benefits under Section 80E of the Indian Income Tax Act. If you have availed an education loan from a registered bank, or any other gazetted financial organisation, you can claim the interest repaid as a deduction from your total annual income. One of the critical things to know about claiming tax benefit on education loan repayment is that you can claim the benefit only for a maximum of eight years.

Final word Education loan is the best way to help your children take their first step towards a rewarding career in the future. The loan covers the course fees, as well as other study-related expenses. Depending on the nature of course that your child wishes to study, you can get a loan to cover 100% of the cost.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.