Education loans play a very important role especially when you plan to study abroad. However, it is very important to understand what kind of circumstances can be faced after taking an education loan. By going through all the terms and conditions, you will be able to make proper plans to tackle situations like rising rates of interest, the need for additional funds, loan restructuring etc.
Most of the government banks in India provide education loans on floating rates of interest which can eventually make the loan costly. Let’s discuss all the major things which you should keep in mind after taking the education loan.
Table of contents
Floating Rate of Interest
There are two types of interest rates offered by the banks i.e. Fixed interest rate and floating interest rate. When you take an education loan on a floating rate of interest, there are chances that it will increase eventually and make your loan costlier. This can impact your short and mid-term financial planning as you may have to pay larger EMIs. The escape from this hurdle is to get an education loan refinance from a bank or NBFC that is offering low and fixed rates of interest.
Do you know what are the charges of loan foreclosure? Check this blog and know about Early Repayment Charges on Education Loan
Loan Transfer or Refinance
Loan transfer is a process where your ongoing education loan gets transferred to any other bank which you select. Usually, an education loan refinancing is done by the borrower in order to get lower interest rates and easy loan repayment. Let’s understand this through an example. Ram took an education loan of INR 10 lakhs from ABC Bank and has started the repayment. After 1.5 years, the bank increased the interest rate and the loan became costly. He got an offer from DCE Bank for a loan transfer at a 2% low-interest rate from the existing loan. He then requested the balance transfer and the loan with ABC Bank was closed. Ram will not be paying the EMIs to DCE Bank for the remaining repayment amount.
Value of your Collateral
When you take an education loan of a bigger amount, the bank demands some kind of collateral in order to provide a secured education loan. You need to mortgage the asset to the bank which they will keep as a security for your loan. Suppose you have kept your flat, which is situated at a central location, as collateral and took a loan of INR 15 lakhs. After 3 years, the price of your asset increased and you got an offer to sell it at a good price but the bank doesn’t allow you to do so. In this case, you can get a loan transfer or refinance and convert your secured loan to an unsecured loan and get your asset freed.
Looking for loan refinancing options? Check this blog on How to Apply for Education Loan Refinance
Education Loan Top-Up
Education loan top-up is basically an extended amount of money given as a loan over your existing loan. When you apply for an education loan, the bank decides the eligible loan amount as per your income and the security. Suppose you are eligible for a loan of INR 40 lakhs but you took only 30 lakhs. Now after 1 year of the course, you need more loans to pay towards the eligible expenses. In this case, you can request your bank for a top-up education loan. The maximum amount for a top up education loan is the total eligible loan amount minus the ongoing loan amount.
Debt Consolidation
Debt consolidation is a financial tool through which a person can convert multiple loans into one single debt. For example, you have an ongoing education loan of INR 10 lakhs and the total due for your credit card bill is INR 1.5 lakh. You also have another existing loan of INR 2 lakhs. Every month you have to go through the stress of paying multiple EMIs on different dates towards your loan. To overcome this problem, you can take a personal loan for debt consolidation offered by all major banks. With this loan, you can foreclose all your existing loans and credit card bills and make your finances stable and stress-free.
Deductions U/s 80 (E) of the Income Tax Act
You can claim deductions for interest paid on education loans under section 80 (E) of the Income Tax Act. The said deduction of tax is available on the interest amount paid on the loan. It shall be noted that only the interest paid will be considered and not the amount which goes toward the payment of the principal. Also, you can claim the deductions only up to 8 years from the date of the beginning of loan repayment. Under Section 80C of the Income Tax Act, the Government of India also allows tax deductions of an amount not exceeding INR 1.5 lakh on the principal loan amount of the education loan.
FAQs
Education loan refinance is the process of transferring the existing education loan from the existing bank/NBFC to a new lending institution in order to get better loan repayment terms and rates of interest.
You can simply transfer your existing education loan to a new bank that is offering collateral-free loan transfer or refinance. The existing loan will be foreclosed by the new bank and you will now pay the EMI that bank.
The maximum amount in a top up loan will be the total eligible loan amount minus the ongoing loan amount. You can get a top up loan from the same bank from which the initial loan was taken.
Collateral free loans are offered by government banks up to a certain amount. Mostly, the banks allow an education loan of INR 4 lakhs without collateral. You can apply for collateral free loans of bigger amounts from private banks or NBFCs.
Debt consolidation is a process of converting all the existing bills and debts into one single loan so that you have to pay only one EMI every month. With the debt consolidation loan, you can foreclose and pay off all the existing loans and bills.
To know more about the loan application process, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
