The Implication of Interest on Education Loan

Student loans in India, popularly known as Education loans, have become a popular method of funding higher education in India with the cost of educational degrees going higher. The spread of self-financing institutions for higher education in fields of engineering, medical and management which has higher fees than their government aided counterparts have encouraged the trend in India. Most large public sector and private sector banks offer educational loan.

When it comes to all the building blocks that form a complete and successful life, nothing is as important as quality education. However, education in India, at least the commonly perceived ‘quality education’ as imparted by acclaimed and influential educational institutions, is decidedly costly and not easily available to everyone- especially those who deserve it based on merit alone. Thus, education loans are vitally important. A barebones explanation for an education loan is thus, ‘funds offered by financial institutions to meritorious and/or deserving students so that the latter can pursue their basic/higher education, in India or abroad’. Almost all banks in India offer education loans, and the demand for it has remained stable with the Indian student community.

Benefits of Education Loan:

When it comes to a complete education loan, the following conveniences are offered as part of the education loan-

• Anyone with a will to study can apply.
• Education loans are provided to pursue all types of academic courses, in India and abroad. The courses include graduation, post-graduation, vocational courses and other certificate courses.
• Loan amounts can vary from a minimum of ?10 lakhs to a maximum of ? 15 lakhs. For education abroad, banks provide loans to the quantum of ? 20 lakhs.
• The applicant’s annual family income and the course pursued are primary determinants for the applicable loan amount.
• Usually, female students are offered discounts and/or lower interest rates when it comes to education loans.
• Government sponsored subsidy schemes, such as ‘Central Scheme to provide Interest subsidy (CSIS)’ help students from the economically backward sections of society avail the benefits of a robust loan for education.
• The applicant need not repay the borrowed amount immediately. Post the completion of the course, the repayment tenure can stretch upto 5-7 years.
• Generally, loans below ? 4 lakhs do not require a security or guarantor.

Current Rate of Interest and Eligibility Criteria:

Upto ? 4 lakhs the rate of interest is not more than PLR (Prime Lending Rate). Above ? 4 lakhs the rate is PLR + 1%. The amount of interest is debited to account quarterly / half yearly on simple basis during the moratorium period. Penal interest @ 2% may be charged for loans above ? 4 lakhs for the overdue period and amount.

Eligibility Criteria:

• Should be an Indian National, individual whose loan has to be guaranteed by guardian or parent.
• Should not have any outstanding education loan from any other bank.
• Should have secured admission to professional college abroad though entrance test.

An education loan can not only fund your higher studies but also help save tax. The interest paid on the education loan can be claimed as deduction, as per Section 80E of the Income Tax Act, 1961.

Some Important Things to Know:

• The income tax benefit can only be claimed on interest part of the loan. The principal part does not qualify for tax benefit.
• However, the entire interest part of the loans repaid can be deducted while calculating your taxable income. There is no upper limit for grant of deduction in respect of interest on loan for higher education. Also, there is no upper limit of the rate of interest which will be allowed as a deduction.
• An individual can avail of tax benefit if he/she has taken an education loan to support higher studies of self, spouse, and children, or for the student of he/she is the legal guardian. So education loan taken for siblings or other relatives don't qualify for Section 80E benefit.
• Deduction can be claimed by an individual only if the loan has been taken in his/her name. 
• This special deduction is also allowed even for education loan availed for study abroad.
• This tax deduction is allowed only if the education loan has been availed from any bank or notified financial institution or any approved charitable institution. So no deduction under Section 80E would be available if the education loan is taken from employer, family or friends. 
• Under the earlier provisions, the deduction on education loan was available only for pursuing full time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics.  However, the list has been expanded to even include vocational studies now.
• The deduction on education can be claimed only when you start the repayment and is available up to eight years, or until the payment of interest in full, whichever is earlier. This means, if you repay the loan within, say, five years, you can claim deduction only till such period.
• Most education loans come with a moratorium period during which you opt not to service the loan. This period is usually until one year after the completion of the course or six months after the student gets a job, whichever is earlier. Accrued interest during the moratorium gets added to the principal and repayment in EMIs gets fixed. If you opt to pay interest during the moratorium period, it gets included while calculating the time limit of eight years.
• To avail tax benefits on education loan, inform your company's HR/accounts department so that less TDS is deducted from your salary. Else, you can claim it by filing tax returns.

Online education loan is the latest development in India. The government has launched an education loans portal, where students can apply for a loan to multiple banks, track their applications, and avail various loan schemes being offered. The student looking for an education loan, there’s an easy way out.

After applying for a loan on the portal, students can track the status of their applications, and avail various loan schemes being offered.

Applying for education loan online, will now be an option for those desirous of availing the loans. Students will need to first register on the website and then fill a simple form to apply for a loan on the portal, which they can also use to write to banks about their grievances, if any, with the loan-sanctioning and disbursal process. The website also provides a link to the national scholarship website where students can access student loan schemes being offered by various government departments.

As of now, thirteen banks, including the State Bank of India, IDBI Bank, Canara Bank, Union Bank of India, Bank of India and Punjab National Bank, are registered with the portal to offer education loans. Of these, five banks have integrated their system with the portal for providing the loan processing status to students.

Thus education loan is instantly available, offers specialized help, is widely and easily available, and offers timely help when it comes to a crucial pillar that promises a successful life- education.

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