Disbursement and Repayment
How is the loan amount disbursed? How and when do you have to start repaying the loan?
The fee for all years is normally disbursed to the college/institute directly by the bank. While applying for a loan, the bank will verify the tenure of the course and determine its total cost as applicable at that point of time. Every year, you are required to submit a form to the bank which gives the details of the money required, after which the bank directly disburses the loan to the college/ institute.
Although the bank may be in India, you can get your education loan amount in dollars for studies overseas; the amount is paid directly to the institution abroad. Banks charge you a fee for the remittance.
You start repaying the principal portion of the education loan six months to a year after finishing the course, or when you get a job, whichever is earlier.
Repayment is done on an EMI (equated monthly installments) basis at the time of starting the repayment. Let’s take an example of a loan amount of Rs 5 lakh for seven years with an interest rate of 13.25 per cent. Assume that you earn Rs 5 lakh per annum on completing your education. When you start repaying the loan, your EMI will be Rs 9,164. You will be paying Rs 1,09,968 a year.
In the first year of repayment, the interest component will be Rs 64,350. You can deduct this amount from your total income while calculating tax. As a result, you will save Rs 21,872 on tax. So, the effective interest rate on the loan works out to around 10.75 per cent (instead of 13.25 per cent) for that particular year.
Some banks will also allow you a moratorium on payment of interest. This means that you can defer payments of even the interest during this period. Hence, there is no need to pay anything to the bank at all – till 6 months after the course is complete, or you get a job (whichever is earlier). If you opt for this option, then the interest is compounded quarterly and added to the principal sum for repayment. This option carries a higher rate of interest, but is a boon to those who cannot repay the loan during the course period.
Banks offer lower interest rates if you start repayment during the moratorium period.
Unlike other loans, education loans do not attract prepayment penalty. If you find yourself able to prepay in the early years of your career, you can pay off the entire outstanding loan amount without any penalty.
If you have opted for a floating rate loan, you cannot switch to a fixed rate option mid-course. However, 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 loan takeover. You need to work out whether the amount you save by switching to a lower-cost loan is more than the switching cost.
If you are unable to complete the course, you will have to start paying the EMIs immediately. Some banks might give you a grace period, either to continue your studies or to start repaying the loan, but this is entirely at their discretion.