College fees - two words that can strike terror in the heart of any parent. Today students do not have the means (parental or otherwise) to fund either tuition fees, course materials, or general living expenses, and find themselves having to apply for education loans. The loan includes not only tuition or college fees but also other incidental expenses for pursuing such studies like hostel charges, transport charges etc.
Education loans are available with two interest rate options: fixed and floating. Most banks offer only the floating rate option. In this case, when interest rates move higher you end up paying a higher amount of EMI, or else, the tenure of your loan gets extended. The education loan providers generally require a guarantor who can take the responsibility to repay the loan, in case the student fails to repay the whole loan amount.
Education loan repayment is deductible under Section 80E of the Income Tax Act. The deduction will apply only on loans taken for higher education. The educational loan should be for either an individual’s or his/her relative’s higher studies. Higher education here means full-time studies for any graduate or post-graduate course in medicine, engineering, or management, or post-graduate courses in applied sciences or pure sciences, including mathematics and statistics.
Now for some repayment tips:
Make loan repayments from income chargeable to income tax. If repayments are made from income exempted from income tax, it will not qualify for deduction. And remember, the amount eligible for deduction is interest component of the loan repayment. This deduction is available for a maximum period of eight assessment years beginning in the year in which the interest is first paid.
The main thing when considering applying for education loans is to make sure that you get the best deal possible for your particular needs. It is worth spending some time researching. It may also be worth seeking the advice of a professional in the field. A little time spent in this way can save you a great deal of money in the long run. Education loans options may seem viable but one should not lose sight of the fact that there is a real danger of falling into a debt trap because you end up committing your future earnings towards your loan repayment, thus increasing expenses every month.
The author is a Certified Financial Planner and is Vice-President, Personal Finance at Apnaloan.com Services (P) Limited.
October 13th, 2008 at 4:55 pm
Its a strong article i must say…with the rising need for further education it is not feasible for people to invest their education from their own pockets,funding education these days are tough since its gotten expensive with the changing scenarios…education loan the way it works one need not worry about the repayment or payment of interest till the education is over and one secures a job…your article is very informative and creates a very good awareness upon the usage of the same.
November 18th, 2008 at 5:56 pm
As you said the interest component of the education loan is deductible under Section 80E of the Income Tax Act. What about the principle component? Does it qualify for deduction under Section 80C for something?
November 18th, 2008 at 9:23 pm
Hi Kavita,
No principal does not qualify for any tax deduction under any section.
As far as 80 C is concerned it gives deduction for children fees and not for the individual fees.
November 20th, 2008 at 11:44 am
I think such simple tax rules should be known to all. The author has described it very nicely and a lay man can utilize this deduction.
By taking educational loan you can ensure your child a better platform for his future educations.
November 20th, 2008 at 3:02 pm
Thanks for the article. Just wanted to know exactly how the bank calculates the interest component. If I have a loan of 3,00,000 and pay about 20,000 each month, how much of it will be part of the interest component?
November 20th, 2008 at 8:52 pm
Hi Piyush,
To find out interest rate we need 3 inputs. Loan Amount,EMI and Tenure. You have not given me the tenure but you could visit apnaloan website and go through the tools & calculators section - “Interest Rate Calculator” and you yourself can find out what is the interest charged to you. Here is the link for your help; http://www.apnaloan.com/loan-advice-india/interest-on-rate-of-return-calculator.html
November 28th, 2008 at 12:56 am
Dear Sir,
I have taken a education loan in the year 2004 and the EMI had to start in the year 2007.In 2007 I was unable to pay any EMI and neither my banker asked me to do so.Now today if i wish to start with the EMI will the interest portion of prevoius years be counted in my tax deduction?
How much portion of my current salary I could be forced to pay as EMI due to pressures been put on me by my banker.Is this loan a very strict loan or the banker is really harsh on me by asking to pay the interest for all previous years in one single payment which is disturbing my mental peace?
December 18th, 2008 at 2:53 pm
hi this is a good informative piece on education loan but in practical terms does education loan exist in its form in India since if you go to ask for education loan many banks do not lend.