A Parent's Guide to Borrowing Loan for Their Children's Education

Almost all Indian parents consider their children's education to be a top priority.

While giving the greatest education is a top priority, few parents may be able to achieve this aim.

This is due to the fact that the expense of education has risen steadily over time, with education inflation reaching a staggering 10%. It is crucial to begin saving as soon as possible. If parents begin saving for their child's education as soon as the child is born, they will have 18 years to save for graduation and 21 years to save for higher education.

You must begin early to accumulate Rs 1 crore

Years to invest Investment needed per month (Rs)

20 10,000

15 20,000

10 43,400

5 1,22,000

Assume @ 12% annualised return.

Even if you start early, you may not be able to complete the needed corpus. This is when student loans come in handy. As a parent, you should not be afraid to take out this loan because it not only helps to upskill your child, but it also has favourable tax benefits.

So, we'll look at why taking out an education loan makes sense today, what you should think about before taking one out, and the traps to avoid.

Make up the Difference

Parents may be unable to save enough money for their children's education for a variety of reasons, including rising prices. A gap might emerge due to a change in the goal's nature. For example, you may have budgeted for your child to attend one of India's premier higher education institutions, only for your child to choose to pursue higher education abroad. This potential deficiency, however, is no justification for failing to plan ahead of time. It is simple to obtain an Education Loan when you have an existing education corpus.

Other expenditures that you did not anticipate at the time of planning may also be to blame for the shortage. Most parents, for example, consider tuition fees, exam fees, and hostel expenditures when preparing, but often overlook living expenses and other costs. The cost of living would be high if the youngster went to study overseas. Because no financial institution will cover these costs, parents must set aside a portion of their money for them while depending on the Education Loan to cover tuition costs.

Several advantages:

Young individuals can learn financial discipline by repaying an Education Loan while they are just starting out in their careers. Because taking out an education loan and repaying it on time helps to establish credit, many parents, even those who can afford it, urge that their children do so.

What to Keep an Eye On

Interest Rate:

When it comes to picking any loan, and an Education Loan is no different, this is the most critical issue to consider. In India, education loans are not inexpensive. Banks, on the other hand, will cut the interest by 1% if the interest is paid while the child is in school and the loan is returned without default after that. Students who are accepted into famous overseas colleges may also be eligible for loans from international institutions.

Securities:

Because defaults are widespread, public sector banks often require securities for loans over Rs.7.5 lakhs. Although most financial organisations offer school loans without requiring securities or a mortgage, it is preferable to do so in order to save money on interest. A house, a parcel of land, or fixed deposits are all acceptable securities.

Guarantor:

Most financial institutions need a parent or guardian as a guarantor as a normal procedure. The number of years that parents have worked has a significant effect in this.

Money Margin:

Determine how much the financial institution will support and how much you will have to contribute. The Margin Money is the name given to your contribution. This criterion varies based on the lending institution, the loan amount, and the location of study. PSU banks, for example, impose a 5% margin for loans over Rs.4 lakhs for students studying in Indian universities and a 15% margin for those studying overseas. Private players, on the other hand, are willing to finance without requiring any buffer. However, don't pay a higher interest rate only to avoid paying the margin.

Moratorium:

Unlike other loans, Educational Loans do not have immediate EMIs. There will be another Moratorium Term for seeking for work in addition to the course period. Typically, the Moratorium Period lasts between 6 and 12 months. The EMI will be based only on principal if the parent pays interest during the course time and the Moratorium Period. If the borrower chooses not to pay interest, it will be accrued, and the EMI will be calculated based on the loan plus the accrued interest.

Time:

This is one aspect of an education loan that has changed dramatically over time. Institutions used to lend for a maximum of 7 years, however this has since been increased to 15 years. As a result, the EMI has been lowered. In other words, even if the starting earnings is minimal, the child will be able to repay the debt. Because there is no penalty for early payment, it is preferable to choose the longest term available. Some people, on the other hand, wish to close the debt soon.

Documents Required:

The paperwork is identical to those of other types of loans. A credit score of 700 or more is regarded good on average. Lenders will also want papers relating to admittance. Papers pertaining to the collateral must also be presented. If you're pledging your unit in a housing society, for example, you'll need to produce papers like your Share Certificate, Original Sale Deed, and the society's No Objection Certificate (NOC), among other things.

Speed:

This is crucial since most colleges do not provide much time for applicants to acquire admission. This implies that you should begin the procedure as soon as possible. One approach to speed the process is to obtain pre-approval and keep the preliminary loan ready. Pre-approved letters come in helpful when several foreign colleges want you to establish your capacity to pay tuition. The ultimate distribution, on the other hand, occurs only when your ward has been accepted.