What are the responsibilities of a parent in an education loan? All you need to know

In the previous article, we discussed how parents can find the best education loan? In this article, we will discuss the responsibilities of a parent in an education loan

Education inflation is making things worse for parents. Let’s cite some figures to help you realize the state of education inflation in India.

The education inflation rate in India was 0.63% in April 2021. But it has increased to 4.12 in the corresponding month of 2022. On the other hand, with the economy taking a hit due to COVID-19, many parents might find it tough to fund their child’s education.

That’s when an education loan is one of the best solutions to make your child realize their dreams.  

You can apply for an education loan in the public sector or a private bank. Even non-banking financial institutes nowadays offer education loans to eligible candidates.

But with increasing costs, savings won’t be enough to fund your child’s education. No doubt, the best way to support your child’s higher studies is with the help of an education loan. So, what are the exact responsibilities of a parent for an education loan?  

Always maintain a high credit score  

If you are applying for a student loan for your child, the lender would ask you to act as a guarantor for the loan. It is crucial for parents to maintain a good credit score to showcase their creditworthiness to lenders.  

A minimum requirement for credit score varies from lender to lender. A credit score of more than 700 is pretty good. Maintaining a good and higher credit score can help you negotiate with the lender to provide the loan at a better interest rate 

You shouldn’t worry much about the collateral  

Parents often hesitate to apply for education loans due to the fear of mortgaging their assets or property. However, you shouldn’t stress much about mortgages and collateral. An education loan can be collateral free. It also decreases loan sanction time and makes the overall process hassle-free.  

Tax benefits on education loan 

Note that tax deduction under Section 80E is one of the main advantages of an education loan. This deduction is available both to the parent and child, based on who repays the loan.

Education loans offer a good tax planning opportunity. Since the complete interest can be deducted under Section 80E, the actual repayment cost becomes much lower.  

Try to instill healthy financial habits in your children   

As a responsible parent, your primary objective should be to instill good financial habits in your children. Good financial habits will help your child to repay the loan on time.

And when your child bears the loan repayment responsibility, it is an excellent way to inculcate financial discipline. In this manner, they can build their own credit history.

Building their own credit history in the early stages opens up a world of financing opportunities for them in the future. 

Go for competitive interest rates  

Interest rate is one major factor that influences the loan amount and EMIs. For instance, if the interest rate is high, the repayment amount will increase drastically. As a parent, your primary responsibility should always be to opt for education loans that come with lower interest rates.  

Education loans in India don’t come affordable. Moreover, the overall NPA of educational loans is pretty high. That’s why banks charge exorbitant interest rates.

As a responsible parent, you should remember that banks decrease interest rate by 1% when it is paid while the child pursues their education. Furthermore, you should repay the loan without defaulting.         

Make use of the moratorium period 

Parents typically make use of the moratorium period. Note that you cannot get a moratorium period on every education loan. Certain lenders and government-based financial companies don’t begin the loan repayment process unless the student finishes the course and completes at least six months in the professional workplace.  

Know the significance of margin money 

You should closely analyze how much the financial institution will finance and how much you need to put in. The contribution from your end is known as the margin money. The requirement of margin money usually varies from one lender to another.  

For instance, the PSU banks typically charge 5% margin money for education loans above INR 4 lakhs for candidates studying at Indian Institutes. On the other hand, they will charge 15% of the margin money if your child enrolls in a foreign university.  

In most cases, private lenders typically don’t charge margin money when you apply for education loans from them. But as a responsible parent, you should make sure not to pay higher interests just to avoid margin money.    

By keeping these facts in mind, you can ensure that your child can repay the loan quickly and become debt-free! Plan your finances well and educate your child wisely to help them become successful in their careers.

Consult an expert advisor to get the right plan 

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