Taking education loan? Check for flexible EMI plans

"I'm not telling you it's going to be easy, I'm telling you that it's going to be worth it," said financial expert Art Williams.

Williams could well have been referring to education or more rather the cost of that education; especially if you need to take a loan for that education.

"Education has become increasingly expensive especially if you are not studying in a government aided school," says Amar Pandit CFA, and founder at HappynessFactory, a financial planning firm. Pandit was speaking about the increasing costs of getting education if you (your parents rather) can't finance your education from their own pocket.

Thus, the student would need to go in for an education loan, but that education loan needs to be paid back eventually with interest!

Hence, it's rather important to know how a student loan works before taking one.

"A good starting point (for taking an education loan), would be the current cost of education as well as your current financial situation," suggests Pandit. There are other points for consideration – i.e. which part of your education needs financing; graduate or postgraduate or both?

Besides education what else do you need money (loan) for such as accommodation, living expenses, travel costs etc. "A collation of all these numbers will help you to narrow down a number that will serve as a starting point for your education loan," advices Pandit.

And now for the fine print, "do check that the course that you are seeking is recognised by the bank," says Hrushikesh Mehta, country manager – India, ClearScore. Not all courses may be approved by the bank.

Not only your course, but even the educational institute where you are taking your course has to be approved by the bank or lending institute. "Most banks have a list of approved courses on their websites so this is quite simple to do," says Mehta.

"For your educational loan the selection of the bank (disbursing organisation), as well as the right loan scheme, is as important as the course itself if you are availing an educational loan," says Gagan Rai, MD and CEO, NSDL e-Governance Infrastructure.

Proper documentation as well as no mistakes in your loan application form are also a requisite for your educational loan.

"Students tend to overlook the details of the scheme (educational loan), says Rai, about a common oversight when students go in for an educational loan.

The loan tenure depends upon the loan scheme that is sanctioned for the student. The normal moratorium period for the educational loan is the course period plus one year. Moratorium is a grace period between taking the loan and repaying it.

"The average rate of interest is 8% to 10% depending upon the scheme," says Rai.

Also, a variable is ancillary expenses such as travel to the place of education, study material etc. This depends on the norms of the individual bank.

"As per Indian Banks Association (IBA) model education scheme collateral or mortgage is required when loan required amount is more than 7.5 lakh," says Rai.

The requirement for a guarantor is usually dependent on the size of the loan. "If the loan amount being sought is under Rs 4 lakh, a guarantor won't be required," says Mehta. For larger amounts (i.e. greater than Rs 7.5 lakh) other than a guarantor the bank may even require some collateral. Typically, Rs 20 lakh is the outer limit of educational loans unless increased collateral can be provided.

Also when going in for your educational loan check your guarantor's credit score and report. "A credit score lower than 780 may result in a loan rejection," informs Mehta.

"Check for flexible EMI plans where repayments grow over time to match your growth in salary," is a helpful suggestion from Mehta, as this reduces your burden in the initial years.

Students can apply for their educational loan even while applying for their institute. However, proof of admission is mandatory at the time of the disbursement of the loan.

"Education loans are available for both Indian as well as Foreign universities. Loan remittance and repayments are done as per banking norms," says Rai.

Unfortunately, paperwork aside there are yet more factors to consider. "Don't forget to take into account the inflation in the country you are planning to educate your child," says Pandit, and also the rate of depreciation of the currency if the education is abroad.

Parents often invest in an insurance plan as coverage for their child's education. "But this is not usually the right approach as it can be inefficient and inadequate to fund their education, here or overseas," adds Pandit. When you take a goal-based approach to your financials, education should be looked at as a separate goal and not just a one-time policy investment. It is crucial to plan, process, and understand where to invest money that will help you achieve this goal.

Another error is that parents might get into a tricky situation if they start planning early as to what career path their offspring might plan for. In such situations, always opt for investing in ways that you accumulate more than you accounted for. "It is always safer to be prepared for an expensive education rather than later realising you don't have sufficient funds to pay for your child's education," says Pandit.

"Irrespective of the fact that you can't prepare for every eventuality; create a scenario where your children can access multiple opportunities," advices Pandit.

This will allow them to get the education that they need and secure the financials for your entire family, adds Pandit about the importance of financing your child's education in this day and age.