The number of education loan applicants have increased astronomically over the years, mostly thanks to the rising cost of higher education. Since education loans can be the first major instrument of debt for most borrowers, a default in loan repayment can harm your credit score significantly, reducing chances of any other loans in the future. Here are some essential tips that help you to make the most of your education loan without walking the path of possible default.
Make use of the Vidya Lakshmi portal for multiple loan applications
Instead of applying for your loan with one bank and waiting for it to be approved or denied before approaching a second one, make use of the single window system under the Pradhan Mantri Vidya Lakshmi Karyakram (PMVLK). With the Vidya Lakshmi portal, you can apply for a loan for education using a single application for up to three banks, thereby saving considerable time and effort. The Vidya Lakshmi portal has over 40 registered banks and 71 education loan schemes for you to choose form as a loan applicant.
Apply with a parent/guardian as a co-applicant
With rising defaults and NPAs for education loans, banks are ensuring strict due diligence when sanctioning loans. As an education loan applicant, you can maximize your loan approval chances if you apply with one of your parents or guardians as a co-applicant. Good credit history and financial health of either one of your parents as a co-applicant increases the chances of a loan substantially. Ensure that your parents have a healthy credit score before applying for a loan as a co-applicant.
Seek loan in instalments
One good thing with loans for education is that banks only charge interest based on the amount of money that is disbursed. Many institutes and universities have a semester-wise payment system. So instead of paying the whole fee upfront, opt for loan in instalments with a payout as and when required. The overall interest accumulation for such a loan disbursed in instalments will work out to be more pocket friendly than a lump sum loan disbursal.
Pay interest during moratorium period
The moratorium period or the time between finishing education and starting loan repayment does not call for repayments of a loan, but interest gets accumulated on a simple interest basis.
If you have taken a loan with a 2 year moratorium period, your loan will accumulate interest for those 2 years. The final loan EMI will then be calculated with the accumulated interest as loan amount, from the day the moratorium period ends. Paying the simple interest component during the moratorium period will make your loan EMI pocket friendly by reducing the final amount of your loan come loan repayment time.
Do not overlook the tax benefits
Education loans offer tax benefits under Sec 80-E of the Income Tax Act. What many applicants overlook is that this deduction is offered only if the loan is taken from a registered bank or NBFC that is a gazetted financial institution. The tax deductions on education loans are offered only for a maximum period of 8 years, so even if you are planning to go for a long tenure education loan, the tax benefits will be applicable for 8 years or till the time the interest is paid, whichever happens earlier.
As an aspiring student, education loans offer financial help for education costs, tuition fee as well as majority of your living expenses. Depending on your course profile and corresponding university you can even get loan to cover 100% of all your education needs.