Collateral

Earlier loans up to Rs 4 lakh required collateral security. Now, however, only loans above Rs 4 lakh require tangible collateral, security for full value of the loan or third party guarantee, depending on the amount. However, the co-borrower, who in most of cases is the parent or guardian of the student, is required to furnish his bank account statement, tax returns of the last two years, statement of assets and liabilities and proof of income.

The margin requirements on education loans are not very rigid. It is 5 per cent for inland studies and 15 per cent for studies abroad for amounts exceeding Rs 4 lakh. The margin money is calculated from time-to-time on the outstanding balance of the loan. You will be required to bring in this margin money on a year-to-year basis, as and when the disbursements are made on a pro-rata basis.

Terms of the loan

The repayment period is normally five to seven years and it commences one year after the completion of the course or six months after securing a job, which ever happens earlier. This is the moratorium period.

The interest rates on these loans are usually on a floating basis. They are linked to the lending rates of the bank and are called PLR or Prime Lending Rate. Normally, interest on loans up to Rs 4 lakh is the same as the PLR; some banks offer half or quarter percentage points lower than the PLR. Loans above Rs 4 lakh attract interest rates that are 50 or 100 basis points above the bank's PLR.

During the moratorium period, simple interest is computed. On commencement of the repayment, compound interest is charged on the total outstanding balance (principal plus accrued interest) in the loan account.Accrued interest gets added to the principal amount and Equated Monthly Instalments (EMIs) are fixed on the total outstanding amount.

Incentives for early repayment

Banks offer incentives to start repayment during the moratorium period. For example, SBI gives you a concession of one per cent on the interest outstanding, if you pay the entire interest amount when it falls due during the moratorium period. Also, if you pay 0.5 per cent of the principal amount every month, you get half a percentage point concession on the outstanding principal amount.

Allahabad Bank offers one per cent concession on the interest factor alone, while Canara Bank offers 0.5 per cent.

Unlike other loans, education loans do not attract pre-payment penalty. If you find yourself able in the early years of your career, you can pay off the entire outstanding loan amount.

Can you switch?

There are no reset options when it comes to education loans. These loans are based on floating rates and you do not have a fixed rate option to switch to. But you can transfer your loan from one bank to another, if you find a more attractive offer.

Normally, one per cent of the outstanding loan amount is charged to the borrower in the case of a take-over. However, you need to clearly work out the savings by the lower interest rate and compare with the switching cost and decide whether to switch.

Special packages

Most nationalised banks offer education loans, while private sector banks usually do not. Allahabad Bank, SBI, Canara Bank, Central Bank of India, Corporation Bank, Syndicate Bank, Oriental Bank of Commerce, Bank of India, Bank of Baroda, Andhra Bank are very active in this segment.

Banks also tie-up with educational institutes to offer comprehensive loan packages to students. This saves students some of the procedural hassles involved with getting the loan sanctioned.

SBI has tie-ups with the Indian Institutes of Technology (IITs) and the Indian Institutes of Management (IIMs) and HSBC has tied up with the Indian School of Business.

Allahabad Bank offers loans at interest rates which are 200 basis points lower than the PLR for students of IIMs, IITs and professional courses. Recently, SBI also tied up with Frankfinn Institute, an air-hostess training academy, for the one-year diploma in aviation, hospitality and travel management.

For those looking to study abroad, SBI has an interesting package as it has tie-up with Thomas Cook. Thus along with the loan, you can get instant wire transfers, foreign currency drafts, travellers' cheques, pre-paid card and insurance.

Earlier, banks insisted that the applicant take an insurance policy. Now it is up to the student.

The tax angle

Education loans allow you to reduce tax liability, although the recent Budget has reduced the extent. Under earlier tax laws, students were allowed to deduct up to Rs 40,000 from total income for the year towards servicing of the principal and interest portions of an education loan for eight years from the time of first deduction. Only students, and not parents, are eligible for this tax concession.

But changes in the tax laws in 2005 have made the tax benefits on education loans less attractive in some respects. Now, a deduction is allowed only on the interest portion of the loan. Though the deduction is not subject to any limits, the repayment of the principal amount will not be taken into account for the tax benefit.

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