| Educational loans are in vogue now. But there are still hiccups like collaterals and insurance |
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Have money, will study is soon going to a recognised idiom. Sample this, a report of HDFC mutual fund points out (See table) that the cost of a degree in engineering was Rs. 1 lakh in 1900. This figure went up to Rs. 3.2 lakh in 2OOO. That is, an increase of over 200 per cent in a time period of 10 years. And it is expected to hit the roof by 2020 at Rs.21.5 lakh. That is, an annualised growth rate of 30 per cent per annum. That is more than the annual salary hike that most parents can dream of.
Loan(ly) no more
Welcome to the world of high cost education. As more and more people aspire for betterment in their lifestyles, they are also beginning to realise that the cost of aspiration is more. But getting the loan is not that simple. When Daksha N applied for a educational loan for her M.SC, she was grilled by several banks because they felt that the low amount required for the course did not warrant the need for a loan. She remembers the officials at Dena bank asking her a lot of questions. "They thought that I would he using it for personal reasons," she explains. However since the amount was rather small she was not asked for any collateral. The guarantee came from her parents. The market in India is largely dominated by public sector banks. They have a market share of over 90 per cent. The interest rates charge is different for India and abroad t. Rank of Maharashtra charges 11.25 per cent for loans up to four lakhs and above that 12.25 per cent plus one per cent.Mahesh D, student of Jamnalal Bajaj had initially applied to Central Bank and State Bank of India but they wanted him to give collaterals. Then he found that Allahabad Bank provided loans for students without collaterals for students of Jamnalal Bajaj. But he was asked to take out an insurance policy. "I didnt have any problem with the insurance policy; the fact that no other collaterals were required was important for me," he says. So what are all these collaterals and insurance policies that the banks require from you for that loan?
Collaterals
According to the Universities Grants Commission (UGC), the government of India in consultation with the Reserve Bank of India (RBI) and Indian Bankers Association (IBA) has framed a comprehensive policy for students. The salient features of this policy being :
- Loans up to Rs.7.5 lakh for studies in India and up to Rs. 15 lakh for studies abroad
- For loans up to four lakh rupees no collateral or margin is required and the interest rate is not to exceed the Prime Lending Rates (PLR). For loans above four lakh rupees the interest rate will not exceed PLR plus one per cent
- The loans are to be repaid over a period of five to seven years with provision of grace period of one year after completion of studies
Insurance
Banks prefer if you take a life insurance cover for the loan. Says Gaurav Mashruwala, a certified financial planner, " It is any-way a good idea to go for an insurance cover when you take a loan because then no one loses the money if something were to go wrong." But for the student it may not be such a happy experience. "Taking the loan itself is such a huge financial burden, the policy and its premium would be an added headache," says a student Reshma P apprehensively. The banks are rather particular about this. So much so that some times they deduct the premium from the loan amount itself. "Term insurance is the risk cover that is popular for these loans," says an insurance agent.
Tax benefit
Repayment of an education loan is deductible under section 80E of the Income Tax Act. With effect from April 2005, the government has removed the ceiling of Rs. 40,000 on interest payment. However, only loans taken for higher education-fulltime studies in any graduate or postgraduate, professional, and pure and applied science courses-may claim deduction. The deduction will be available for a maximum of eight years starting from the day you start repaying. Usually institutions are willing fund 100 per cent of the amount up to four lakh rupees. However, if the quantum of borrowing is greater than that, the borrower has to keep margin of five per cent for courses in India and margin of 15 per cent for courses abroad.
However, the industry is still at a nascent stage. Till March 2005, the banking system had extended a total of slightly over Rs 6,000 crores to around four lakh students. It is expected that the segment will start booming soon in the coming years because of the large number of business school, professional courses mushrooming all over the country.
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