Lessons on education loans and what’s changed in the pandemic

A reality check on education loans after Covid-19 changed the entire academic landscape

Students all over the country are preparing for higher education. The pandemic has disrupted the schedules of schools and university exams. Despite the challenges, many students are evaluating their options. There will be students who would like to pursue education in a foreign country not wracked by Covid-19. When it comes to education — domestic or foreign — one must also look at the financing options. Higher education isn’t cheap. But there are education loans to bridge the gap. Here’s a primer on education loans and what’s changed in the pandemic.?

Covid impact

College admission processes have been delayed because of Covid-19. Many universities haven’t been able to conduct examinations. As a result, last year’s sessions are still going on and new sessions have been delayed. Despite this, many eligible students want to prepare for admission to their preferred institutions. Upon acceptance, they can approach the lending institutions such as banks to finance their education. They will have to fulfil several conditions to get the loan though.

Who is eligible

Indian students generally in the age group of 18-35 can apply for a loan on getting admission to a recognised educational institution. You can take this loan not only for university studies but also for any recognised training programme.

As students do not have any income while taking the loan, they often have a parent or guardian as a co-applicant. Students can repay the loan on their own from their earnings after the completion of the course.

If they are unable to pay, the responsibility will pass on to the co-applicant.

What all will be covered

An education loan covers all the expenses of your studies such as tuition fees, cost of texts, lab and library fees, purchase of laptop etc. Apart from this, the cost of living such as hostel and food is also covered. Because of Covid-19 and home-based online learning, not all these options will be made available in the course. Therefore, the loan will finance only what’s required by the course.

Keep in mind that if the loan is small in value, you could get 100 per cent financing. If the loan is large, the bank would like you to pay a percentage of the cost from your pocket. What is big or small varies from one lender to another. The loan can be of a few thousand rupees or even a crore. The student only needs to be eligible for it. The lender is primarily concerned with whether the student or the guardian have the repayment capacity. This is ascertained through proofs of stable income, taxes paid, assets owned and credit score.

Security may be required

Generally, banks provide education loans up to Rs 7.5 lakh without any security, meaning you will not have to mortgage any property or assets with the bank for the loan. If the loan is bigger, some banks may insist on a security such as a fixed deposit, property etc.

The security is returned to the borrower on full repayment of the loan. If the student has been admitted to a reputed college such as an IIT or IIM, some banks may even lend up to Rs 40 lakh without security.

When to repay

You can get up to 15 years to repay an education loan. Students are also given a payment holiday, that is a moratorium. It’s usually for 12 months from the end of the course after which students may need some time to find employment and start payments. The moratorium can also be extended.

Because of Covid-19-related problems, the government itself had announced a moratorium on all loans in 2020. However, during any moratorium, interest will continue to get added to your loan balance, which will increase your EMI burden. As the moratorium essentially makes the loan bigger, it is advisable to start repayment as soon as possible.

Tax savings

Once you start repaying your education loan, you get exemption under Section 80E of the Income Tax Act. You can save tax without limit on the interest paid on your education loan for eight years from the start of repayment. If the student’s parents have taken the loan, they will be eligible for the tax exemption. This exemption is available only on loans taken from a certified lending institution such as a bank or a non-bank institution. If the loan is taken from family, friends, or office, no exemption is provided.

Keep in mind that because of Covid-19, students have faced difficulties in completing their studies and finding jobs. If they are unable to find a job, they will have trouble repaying the loan. Banks have come under some pressure because of rising education loan defaults. That is why if you are taking a loan, make arrangements to repay it as well. Failure to repay the loan can result in forfeiture of your security and spoil your credit history, which will make it difficult for you to get a loan in the future.

The article originally appeared in The Telegraph.

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