How to help your child find the best Education loan?
The cost of education, especially higher education, is increasing at a rapid pace. For instance, in 2016, tuition fees in IITs were increased from 90,000 INR to INR 2 lakhs per annum. Moreover, a medical or a management course costs anywhere between INR 10 lakhs to INR 20 lakhs in India.
If your child pursues the same course abroad, costs can go up to INR 50 lakhs! Self-financing is one of the best options. However, sometimes, parents can fall short of arranging the entire cost of education for their kids. With a good education loan, you can bridge the shortfall.
With the cost of education skyrocketing, education loans greatly assist parents in meeting their child’s aspirations. With an education loan, parents can afford to send their children for higher studies abroad. Here are some strategies to help your child find the best education loan.
Research the best interest rate
Look for the best interest rate when selecting an education loan for your child. Education loans don’t come cheap and the interest charges can be hefty. But in most cases, banks can decrease the interest rate if the EMIs are paid properly on time. Moreover, if the loan is repaid without default, you can evade higher interest rates.
Since defaults are pretty common, lenders insist on collateral for education loans. It is crucial to be aware of collateral before applying for an education loan. The collateral for an education loan usually involves fixed deposits, a house, land, etc. Note that with collateral, you can decrease interest rates.
Co-Borrower or guarantor
Note that it is a standard practice for most financial institutions to insist on a parent as the guarantor. The number of years of service the parents possess plays a crucial role here. If you are about to retire while applying for an education loan, the lender won’t consider you as a guarantor. Moreover, you have to incur higher interest rates in the absence of a guarantor.
Importance of margin money
You should check how much the lender will fund and how much you need to pay as a down payment. However, this requirement varies based on the lender, loan amount, and place where your child will study.
For instance, PSU banks usually charge a 5% margin for loans above Rs. 4 lakhs. On the other hand, they will charge a 15% margin money for studies abroad. Private banks may fund without any margin requirements. But be careful, you may want to refrain from paying higher interest rates just to avoid paying the margin.
Select the right bank
A number of banks offer educational loans for various courses in India and abroad. You should select a bank that offers you the best moratorium period. Furthermore, the bank should offer you competitive interest rates so that your child finds it easy to repay the loan. It is usually recommended to select a lender that offers you the best loan terms rather than finance.
You should also check if you can pay EMIs in advance or make part payments towards the loan. It is imperative to learn about all the service charges that are applicable to your education loan. Parents opting for education loans should know that both part payments and prepayments come with a warranty.
Plan for repayment
Budgeting is always an important part of the repayment of the education loan. Once your child starts earning, they need to strategize to pay back the loan. Inculcating healthy financial habits in your child is, therefore, crucial for effective repayment of the education loan on time. Loans can become burdensome after a while. Hence, it is better for your child to know how to repay properly.
Look for tax benefits
Many parents do not look at the tax benefits offered under Section 80E of the Income Tax Act on the interest you pay for the educational loan. However, you should apply for this loan from a gazetted financial institution or an Indian-scheduled bank. However, these deductions are available only for the initial assessment years and seven years after.
Apply for the loan in installments
To make it easy for your child, always apply for the education loan in installments. Lenders charge money on the amount of money disbursed. Since you have to pay tuition fees every 6 months, then try to ask for a disbursement plan that helps you reduce the interest and pay your bills on time. Interest accumulated will be fewer when you apply for the loan in installments.
If you are looking for the right education loan for your child then follow these strategies and help them secure the right deal to kickstart their education dreams.