For long, parents have been saving for the primary and secondary education of their children, as well as any higher studies. The past 10-15 years have seen a change with more students willing to take on the responsibility to fund their education, and this is where student loans play an important role.
Walnut App CEO and Co-Founder Patanjali Somayaji lists five essentials to keep in mind when taking a student/education loan.
* Be clear on the reason for taking a student loan
Spend some time to think about your goals and employment prospects and how your chosen course or degree can help you attain those goals. Check your eligibility criteria and compare course fees, facilities and benefits across colleges and universities. Confirm your financial situation and how much liability you are willing to take on.
* Potential job opportunities
Are you availing a student loan right after graduation or have you worked for a few years and are now looking to better your job prospects with a higher degree? Study the job opportunities available in the market as well as your potential earning capacity once you complete this course. That is an important indicator of your capacity to repay the student loan later.
* Check and compare loan terms, interest rates and processing fees
After deciding on the course, facilities and future prospects, check loan terms of several banks and NBFCs before selecting one. Compare the rate of interest, repayment terms, processing fees, prepayment charges and so on. Check if any guarantor or collateral is needed. Understand the scope of coverage (tuition fees, study material/equipment, accommodation etc.) under the loan and what you will have to bear from your pocket.
* Understand and use the tax benefits of a student loan
A deduction is allowed under Section 80E of the Income Tax Act, 1961, for student loans, and this is applicable only on the interest you pay – not the principal amount. This deduction is available only for loans taken from registered banks and NBFCs; so it is important to check that before finalising one. There is no limit to the amount of interest you can claim as a deduction, and this deduction is available to you for up to eight years or till payment of interest in full, whichever is earlier.
* Ensure a backup plan
It is possible your current/future employer or even the industry itself could face some problems and you could suddenly be out of your current job or struggle to get another one – your education loan still has to be repaid irrespective of that.
Keep a control on your spends and save money regularly. Build an emergency fund for at least 6-8 months of expenses so you don’t default on your instalments, which will impact your credit score.