All parents throw their weights in to provide the best possible education for their children. Burgeoning education costs have pinched the pockets sharply. But with tax incentives and interest subsidies, arranging fees through loans is not too difficult in current times.
COURSES AND COLLATERALS
Post the 2009 budget, almost all courses after senior secondary examination (or post high school) qualify for education loans. Apart from full time graduate and post graduate courses which are eligible for a loan, part time courses in specified fields such as engineering, medicine or other vocational training are also eligible.
Loan amounts range from Rs 10 lakh to Rs 20 lakh if the course is pursued in India or abroad respectively. For a loan amount up to Rs 4 lakh, no security is warranted. In case it crosses Rs 7.5 lakh, tangible assets are required as collateral security. Between Rs 4 and 7.5 lakh, a third party guarantor or a co-borrower, who can be parents, spouse or legal guardian, is required.
While parents may detest loans, treating it as a last option, the benefits doled out in the form of tax benefits are attractive. According to the Income Tax Act, the entire interest paid on the education loan is tax-deductible under Sec 80E. The capital paid won’t get any benefit. So, a parent falling in high tax bracket (30 per cent) can get the maximum benefit as an education loan at 12 per cent comes out to be 8.71 per cent in effective rates. This ends up quite cheap in today’s regimes when personal loans are available at 16-18 per cent.
The deduction for interest payment is available for eight consecutive years. The first year will start from the year in which the borrower begins paying the interest on the loan. Say the borrower has opted for a moratorium. Moratoriums generally stand for the duration of the course plus either one year after the course is complete or six months after landing a job, whichever is earlier. In such a case, the eight year deduction period begins later.
If the loan has been serviced in fewer time frames or, say, during moratorium period, the tax benefit on interest would be available during such period only.
LENDING ENTITIES, BORROWERS
Note here that a loan taken from your friends, relatives or unauthorised financial institutions will not make you eligible for tax benefits. Banking institutions covered under the Banking Regulation Act, approved charitable institutions or NBFCs such as CREDILA (an arm of HDFC) are covered for this benefit.
The beneficiary of the education loan must be defined for the benefit to be available. Under present conditions, a spouse, children or legal guardian only can take loan on behalf of the student and can claim deductions. If the student himself is the borrower, he will get the tax benefit once he starts paying the EMIs.
While the government aims to make education affordable, it also provides incentives to the needy students, especially to Economically Backward Classes. A student having total family income less than Rs 4.5 lakh can avail the benefit of interest subsidy under ‘Central Scheme to provide Interest Subsidy (CSIS)’ for the moratorium period. But this benefit is available only once, either for an undergraduate course or a postgraduate programme.
Additionally, all major banks offer interest incentive of 1 per cent, if the loan is serviced promptly as and when applied during the moratorium period. There is also 0.5 per cent concession in interest on the card rate for girl students.
CONSEQUENCES OF DEFAULT
In an era where credit reports are readily available and are sought by financial institutions before disbursing loans, students must service the loan properly. Defaults are detrimental to credit history and can have long-term ramifications, affecting future credit facilities.
(The author is Senior Manager – Research & Advisory (Third Party Products), Motilal Oswal Wealth Management.)