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6 things to keep in mind before taking a study loan

This simple guide to borrowing for higher studies abroad shows that careful budgeting goes a long way in making your dreams come true
BY Manish Shah |   05-10-2016

Above: Don’t let student debt kill you (cartoon by DonkeyHotey, used under CC BY 2.0 licence)

Education is one of the important parameters in today's job market. Children aspiring to IITs and IIMs is no longer unsual – these institutes are considered to be among the best in the country. Every parent wants to provide the best education for their children. Parents are emotionally attached to this goal.

Many students go abroad to study. This could be because they cannot find their choice of courses locally, or are unable to secure admission in one of the country's colleges or universities. These courses abroad lead to an increase in the overall cost of education, due to foreign currency fluctuations, boarding costs, tuition fees, travel, food, and other expenses.

While parents strive to provide the best education to their kids, here are six things to keep in mind while opting for an education loan.

  1. How  much do you need to borrow?

    The amount to be disbursed is at the sole discretion of the lending institution. The student loan may be disbursed in full or in instalments. This is done by taking into account the requirement of funds and fee schedule as assessed by the bank or lending institution directly to the universities. Generally, banks disburse around Rs 10 lakh for study in India, and around Rs 20 lakh for education abroad. So you may have to dip into your savings to bridge the difference. Banks may consider lending higher amount in special cases at their discretion.
     
  2. How do you plan to repay?

    Many colleges and universities advertise high placement ratios and huge salaries to entice students. These figures are true, but are achieved by only few students from each group. It is possible that after completing your degree, you may get a job either abroad or in India. In India, you may earn less than what you might have earned with the same designation abroad. This could put pressure on your finances, if your monthly income is less than the EMI on your study loan. Repayment starts after a moratorium period or repayment holiday, that is, one year after the end of your studies or six months after getting a job, whichever is earlier. The borrower must have a repayment plan in place before EMIs start.
     
  3. Do you have a contingency plan?

    It could happen that you don’t get a job right away after your complete the degree. Rather than assuming that you will never be in such a situation, it is better to plan for this possibility. Start saving enough for a corpus amounting to six to eight months of your EMI. You can save this amount could in liquid arbitrage or recurring deposits.The most effective way to ensure that the cash saved multiplies is to let the money grow until it accumulates into a lumpsum. You can then use this to pay off the loan. How long you should save depends on the returns you get, the amount you are investing, and how much you owe.
     
  4. The loan defines your credit score

    The repayment of an education loan forms the initial base for the credit history. These loans are one of the first form of borrowings for most students. The schedule repayment of the same enhances one’s credit score, which in turn helps to avail other different kinds of loans. A default on the repayment leads to a decline in the credit score.
     
  5. Do you know the income-tax benefits?

    Education loans come with tax benefits under Section 80E of the Income Tax Act. You can get a tax deduction for taking a study loan from a financial institution or approved charitable institution. This deduction applies whether you study in India or abroad, and is allowed only on the interest component, not for the principal amount. This deduction in addition to the Rs 1.5 lakh deduction under Section 80C. There is no upper limit for the interest deduction.
     
  6. How fast can you repay?

    Many people believe that a longer tenure, which results in a lower EMI, will not put pressure on their finances. This is true, but the total amount repaid as interest is greater. The amount you pay as interest for a 5 year loan will definitely be less than for a 10-year loan. The EMI is a combination of your outstanding loan balance and your interest. Keep in mind that the tax benefit under Section 80E is allowed for a maximum of 8 years. So aim for a tenure eight years or less.
 

Manish Shah is co-founder and CEO of BigDecisions.com, a Mumbai-based personal finance platform


Related stories:
How to budget for your expenses as an international student
Money-saving tips for university
Financing your education with Indian student loans
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