It is now much easier and cheaper to get an education loan today than it was even five years ago. This is mostly due to an increased push by the central government to popularise such loans and greater competition among lenders following the entry of NBFC's into this space.
The banks in India provide education loans and schemes to students who want to pursue their higher studies in India and also for students who want to take up their higher studies abroad. The amount of loan provided by the bank can differ from one another and their interest rates may vary as well.
List of Contents for the article "Education Loan Repayment"
The following sections provide in-depth information about the education loan repayment methods and benefits that one could attain. Please click on the section who want to know about first by directly clicking on the link provided in the contents below.
- Benefits of Education Loan under the Income Tax Act
- Ways to Reduce Student Loan Costs
- Repayment of Loans in Public Sector Banks
- Repayment of Loans in Private Sector Banks
- Delay in Student Loan Payment
Benefits of Education Loan under the Income Tax Act
To be precise, Student loans are created to play a significant role in the life of students who are not willing to pay for post-secondary education and the associated fees such as tuition, books, and supplies and other living expenses.
Students loans are completely different from other types of loans. The interest rates are considerably lower than other loans and the repayment schedule may adjourn while student still in the school or college.
This is the reason why students loans are higher everywhere. Student loans will be helpful for the students to possess education of which they desire.
Under Section 80E of the Income Tax (IT) Act, a certain amount of deduction in taxes will be provided for those who are repaying the education loan they borrowed.
For calculating your taxable income for a particular year, the entire interest part of the loans repaid during that year can be deducted. There is no upper limit.
This tax deduction will be given only to those who are repaying the loan borrowed by themselves, their spouse, or their children.
A tax deduction benefit will also be extended to the legal guardian of a student as well.
The period of tax deduction will be for a period of 8 years starting from the year in which you start repaying the loan or until the interest is fully repaid whichever is earlier.
The total amount paid as the interest to the bank can also be deducted from the income earned per financial year.
Ways to Reduce Student Loan Costs
Below are the ways to reduce student loan costs
The students have the option to pay the complete interest amount during the course period and grace period. This will be beneficial as 1% concession in the rate of interest will be given when the repayment period commences.
When the EMI’s are paid on time an additional interest will not be charged on the loan amount that has to be paid. This will also help availing loans easily in the future.
- Student borrowers honestly get many relaxations. These can be used to make the repayment smoother starting with reducing expenses. Margin a money percentage of expenses that you plan on paying while the bank pays the rest. This is a prerequisite on all loans above Rs 4 lakh.
The rule is 5% for studying in India and 15% for studying abroad. However, many banks relax this rule for meritorious students.
Central Scheme for Interest Subsidy on Education Loans is a scheme introduced by the Human Resource Development (HRD) ministry in order to uplift and empower the Economically Weaker Sections (EWS).
Under this scheme, a subsidy on interest will be provided for induvial whose annual gross parental or family income is below Rs.4.5 Lacs. This scheme, however, is only applicable for studies in recognized Technical and Professional courses in India.
- Make as many frequent pre-payments as possible. Whenever you get extra cash such as bonuses, try and divert some cash towards pre-paying the loan.
If you are in a comfortable position and can afford to do so then one can or should get his or her EMI amount increased by getting in touch with the bank and requesting them. The larger the EMI amount, the shorter will be the loan repayment tenure.
One of the many interesting features of education loans in India is the moratorium period. The borrower has the option not to pay the EMI for up to 12 months after the course ends or after six months from the date of commencement of work (employment), whichever happens, to be earlier or easier.
The most important thing that one needs to keep in mind is that the moratorium is not an interest-free period.
- Hence it is advisable to start repaying EMI's as soon as possible in order to reduce the interest burden. Since an education loan is usually the first loan one takes, one can also earn a good credit score by paying it back on time.
Repayment of Loans in Public Sector Banks
Education loan repayment rules
Students who take education loans for those particular students repayment begins after the moratorium period. The period begins right after one year the students complete the education or six months after getting the job.
The person who has provided loan must have a repayment strategy so that the process of clearing the loan for a student will not be complex or complicated.
The public sector banks often have standardised rules across different banks as the rules have been laid down by RBI (The Reserve Bank of India).
In the case of a government-owned institution, the repayment of the education loan borrowed commences after the course is completed and also after the completion of the moratorium period.
Moratorium period is also known as the EMI free period where the students are given one year after the course completion or 6 months after securing a job (whichever is earlier) for before the commencement of the repayment period.
The amount of interest accrued during the course period as well as the moratorium period will be added to the principal amount borrowed and the repayment will be fixed under the Equated Monthly Installments (EMI) scheme.
If the student is able to pay the full interest before the commencement of repayment then EMI is fixed only on the basis of the principal amount. This is highly advisable as it helps reduce the burden and the cost.
The students have the option of prepayment and there will be no penalty charges for the amount prepaid. The student can prepay their education loan at their convenience.
Repayment of Loans in Private Sector Banks
While taking an education loan is easy, paying back requires careful planning and due diligence. Hence understanding the rules and liabilities whilst seeking all the possible benefits is highly advised. The repayment rules happen to slightly vary from one private sector bank to another such as HDFC Bank, Axis Bank, ICICI Bank and so on.
Standard private bank education loans usually provide three types of repayment alternatives:
Moratorium on Repayment
Moratorium on Principal Repayment
Discounted Interest Rates
The repayment will begin after one year of completion of the course.
During this period the students have to have secured a job.
The minimum amount of time given for repayment of the loan is 3-years and the maximum time allowed will be 15-years.
A certain amount of processing charges will be charged by the private sector banks.
An additional rate of interest will be charged if there is a delay in the payment of the loan.
Apart from these repayment options, a private bank education loan scheme also provides the option to avail insurance cover on the amount of the education loan if the student so wishes. The smartest thing a student can do is to reap all the possible benefits one can get out of a loan before taking and also during the repayment
Delay in Student Loan Payment
People default on education loan for varied reasons. A big gap between the increased fees of an institution and the salary offered by the companies during campus placement is one of the prominent reasons leading to delayed payment and defaulting for that matter. Dropping out of the educational institute or getting laid off could also result in a default.
There are several options that are available for students when one is unable to make the payments on the student loans. But this is only advised as a last resort under genuine, unforeseeable causes and reasons. Some of these options the one can consider or explore in detail based on individual applicability are as follows:
- Delaying payments on your loans through forbearance or deferment programs
- Getting your loan cancelled and eliminating all payments
- Discharging your loan through bankruptcy proceedings
- Getting on an income-sensitive or income-based repayment schedule
- Consolidating your loans into one loan.