Education loans: What parents should knowEditorial Team654|0Last Updated:05:17 pm, June 29, 2012
The most important part of choosing an education loan for your child is working out the amount that you pay back. Doing your homework now will save you from any unwanted surprises.
How is the education loan amount calculated?
Total loan amount = interest rate + EMI + processing fee + extra charges
Ask the bank to clarify any extra charges – some banks can be vague about additional fees. Most borrowers make the mistake of concentrating on the principal and interest.
How are interest rates calculated?
There are two types of interest rates: fixed or floating (variable). The type of interest payable starts the day after the loan is disbursed.
A fixed interest rate means that the interest remains the same for the duration of the loan. This is normally followed by private and foreign banks.
A floating/variable interest rate rises and falls according to the Prime Lending Rate (PLR) set by the Reserve Bank of India. This rate changes every six months to every year. Nationalised banks usually follow floating interest rates.
How is interest payable calculated?
Interest payable is calculated on a quarterly reducing method. This is on a simple interest basis. Once you start to repay the actual principal, interest is calculated on a compound basis.
How is the margin amount calculated?
The margin amount refers to the amount of the education loan that the borrower pays. For example, overseas education loans are given a margin of 15%. The bank pays for 85 per cent of amount and the borrower pays for the remaining 15 per cent.
What is the interest portion?
The interest portion is the amount of interest the borrower pays to the bank from the month that the loan is disbursed during the duration of their course.
When do EMIs start?
EMIs refer to the amount of principal and interest payable when a borrower begins to repay their education loan. Check with your bank as to when repayments start. Different banks have different time periods.
Who can be a guarantor?
A guarantor is a co-applicant such as parent, spouse, siblings, in-laws or any other close relatives.
Can my child claim income tax relief for educational loans?
Yes, but the tax relief is only valid if the loan is taken from a bank or recognised charity. Your child can get some tax relief under Section 80 E for the interest payable. The tax benefits start once repayment on the education loan starts and available up to 8 years. There is no tax benefit on repayment of principal amount of the education loan. Check with the Income Tax Department for details.