Rising funds for higher education fees

An international education is certainly not cheap with annual expenses amounting to over 15 lakhs at most international institutes. Although parents aspire to give their children the best education possible, such finances can prove to be intimidating. It is also quite traumatic for a student to worry about finances while managing a demanding academic schedule. Thus, students and their families should plan the finances to meet the entire cost of education as stated on the admission letter; as it is required for the visa process, and also budget the cost for the entire period of education.

Many private agencies offer loans on attractive terms, for studying abroad. However, not all private agencies are ethical and there is no effective way to research a private agent. Loans by banks, insurance companies, and recognized financial institutions are less risky.

All graduation, post-graduation and professional courses from institutes accredited by the country of delivery are eligible for a loan. For education abroad, the maximum loan amount is from Rs 15 lakh to Rs 20 lakh. For instance, IDBI bank gives a maximum of Rs 15 lakh for studies abroad while SBI provides a maximum of Rs 20 lakh. Professional courses like MCA, MBA, MS get a preference.

Educational loans are categorized as priority sector lending for public sector banks. Therefore, their interest rates are lower than those for personal loans. The expenses covered under the education loan are: fees payable to college/hostel, examination fee, library/laboratory fee, purchase of books/equipment, any security deposit(s) and the purchase of a computer. Travel expenses are sometimes covered as well, for those studying abroad.

Interest rates on educational loans range from 11.25 per cent to 13.5 percent. For example, SBI charges 11.25 per cent for loans up to four lakhs and 13.25 per cent for those above four lakh, while Bank of Baroda charges 12.5 percent for loans up to four lakh and 13.5 per cent for those above. Loans above four lakhs and up to Rs 7.5 lakh require a third party guarantee and tangible collateral security for full value of the loan.

The processing fee varies from bank to bank. For example, public sector banks do not charge any processing fee, whereas IDBI charges 2.25 per cent as a processing fee.

Students need not take a loan for the entire amount at one go. Usually, there is no security deposit for loans under Rs four lakh, though interest charges are the same and become operational as soon as you take the money. Students may use the Rs 4.5 lakh facility by processing small loan amounts with different banks for each semester rather than applying for a big amount at the same time. This has a number of advantages. Students have the option to explore other funding options at the university after going there. They are usually allowed to work 20 hours a week, and have the additional opportunity to apply for scholarships or assistantships based on performance in the first semester at the selected university. This is especially true of education in the US, where the professors have the power to reward a high performing student in various ways. Sometimes, students can reduce living expenses by finding cheaper accommodation and living frugally. This helps to lower the original estimates of the total cost. Since the banks pay the university directly, families may process the loan amount when needed rather than all at one time.

Tax Benefits:

The repayment of a loan generally begins six months following completion of courses. The tenure of the education loan ranges between five years to 10 years, depending on the bank and loan amount. The deduction under section 80 E of the Income Tax Act provides for the interest paid on educational loans; there in no cap on the interest amount being paid. Once applicable only for self education, today this facility is extended for the education of one’s spouse and children. This deduction is allowed for seven years and the loan must be taken for higher education purposes only. Moreover, the loan has to be from a financial institution or a government approved charitable institution.

Assume that an individual takes an education loan of Rs five lakh for seven years and the interest rate is 13.25 percent. He/she starts earning Rs Five lakh per annum after completing his/her education. Once he / she starts repaying the loan, his / her EMI is Rs 9,164 annually; this individual will be paying Rs 109,968. In the first year of payment, the interest component will be Rs 64,350. So he /she can claim deduction of the amount from his total income. As a result, he /she will be saving Rs 21,872 towards tax. So, considering the tax benefit, the effective interest rate on the loan comes down to around 10.75 from 13.25 percent, for that year.

The prospect of raising funds in order to meet higher education fees is overwhelming to many families. Hopefully with the increasingly attractive option of educational loans, more families will be able to successfully manage this difficult process.