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Delhi Govt’s Educational Loans To Students Will Help Expand Facilities
The launch of the Education Loan Guarantee Scheme by the Delhi government to enable students of all universities, colleges, technical institutes, skill centres, polytechnics and ITI’s in the national capital to get an educational loan is a game changer that other states should adopt. Students preparing for courses like CA, ICWA or CFA and even those doing skill development courses specified by the Delhi government can also avail of the educational loan.
For the first time in the country a state government will provide a guarantee for all student loans up to Rs 10 lakh irrespective of the social or economic background. The scheme will also ensure that the students do not have to provide any collateral or margin money to the banks. The only condition is that the student should have done their education in Delhi and are studying in institutions whose fees are regulated by the government.
To meet the costs of the scheme the state government has set up a Higher Education and Skill Development Credit Guarantee Fund (HESDCGF) for providing guarantees to the banks against any default on these educational loans. It will have an initial corpus of Rs 30 crore and will also collect an annual guarantee fee of 0.5% of the outstanding amount of the loan from the banks each year.
In case of default by the students the HESDCGF will initially settle 75% of the claims of the bank after the initiation of the recovery proceedings and the remaining 25% will be settled after ascertaining the final loss of the bank at the end of the recovery process. The threat of defaults are to be minimized by making the parents or the legal guardian’s joint borrowers of the educational loan along with the student. A default will also negatively impact the credit rating of the student and parents.
The educational loan would be available not only to students of government owned institutions but also to the private or self-financing institutions which have been a minimum grade of A+, A or B from either the National Assessment and Accreditation Council (NAAC), National Board of Accreditation (NBA) or the State Fee Regulatory Committee (SFRC).
Banks will be allowed to charge a maximum simple interest rate of Base rate plus 2%. Application for loans is to be made simpler by receiving them in online and ensuring sanction for eligible loans in 15 days. Rejection of individual loans is to be intimated the higher education department of the Delhi government.
The repayment holiday of the Education loans will extend up to one year after the completion of the course and will have to be paid in fixed equal monthly installments over a period of 15 years. Banks are to also allow for telescoping of repayments with the size of installments going up in the later years. Students availing of educations loans are also to given life insurance cover.
This educational loan facility worked out by the Delhi government will be a game changer in the annals of higher education and could help boost both the quantity and quality of the higher education infrastructure. This is because the liberal education loans will increase manifold the number of students taking up higher education.
The competition among educational institutions to attract more students and the government stipulations for securing accreditation by educational institutions providing admission to students availing educational loans will ensure improvements in quality of education. The educational intuitions would also be forced to improve the course content in tune with market needs to ensure employability of the students.
By liberally expanding the educational loan scheme the Delhi government has wisely chosen to follow the approach most popular with the governments in advanced economies. This would help expand educational loans as an important market to the banks like in the US where the outstanding educational loans of more than $ 1.3 trillion makes it the largest form of household debt next only to mortgages.
The liberal educational loan of the Delhi government, the risks of which are borne by the government, is in line with the practices in advanced countries like Australia, Canada, Denmark, England, France, Germany, Japan, Sweden and United States where the funds are provided by the government to improve student access to higher education. The shifting the burden of losses from the banks to the government is a landmark move which will give a big boost to higher education and help roll out important national programs like the Make in India initiative and also build a new knowledge economy in tune with the needs of changing times.
Paying off Education Loan in India
Education is perhaps an individual’s most precious resource today. In fact, nowadays education is at times equated to an investment, which in all truth it is. However, if we purely take perspective at education as an investment point of view, the price of education at times requires you to take loans from banks or other sources, which require you to pay off the debt after your “investment” or education starts bearing fruits. As easy as loan grant sounds, the more difficult it can be to pay off. However with careful planning and timely repayments, one prevents himself/herself from coming under what is called “debt pressure”.
Should you prepay your education loan?
Education loan is basically an amount bank has paid on your behalf. So with every passing day, this loan accrues some interest. You pay this loan in EMIs because you cannot pay off all the loan amount i.e. principal and interest at one go. So one way to limit the interest that you will pay on education loan is to pay it off as early as possible. But education loan also helps you save Tax under section 80E. We have created an excel sheet that will help you decide when to pay off the education loan.
If you cannot prepay the loan, follow these tips while paying EMI on the education loans in India:
1) Start Early:
Don’t wait till your graduation, to start planning on the repayment. Have a repayment model ready as soon as the first phase of education (generally the first semester) is over. This will enable you start saving early and gradually ease off the pressure of the interest which piles up and by the time of moratorium period ends, you would have already started with the repayment. If you have some savings already in your account when you graduate, you could start paying the loan even before the moratorium period begins. Do keep in mind that your loan is accruing interest even during the moratorium period.
2) Set a comfortable EMI. Don’t be over ambitious:
Setting a lower EMI for a longer duration might just be a better option than ambitiously trying to pay off the loan early. Paying off the loan early is always the better option, but not by compromising on other important needs like lifestyle expenses or training costs for furthering professional skills.
3) Prefer a loan from Government Bank :
PSU banksOpens in a new window typically offer loans at lower rates than private banks. They are also more lenient when it comes to prepayment of the loan. E.g. Andhra bank does not levy any charges for partial or full repayment while HDFC banks charges penalty proportionate to the amount of loan outstanding.
4) Speed up the repayment using the tax benefits:
Education loans provide you tax benefits and the amount that you save can actually be used quite significantly for paying off your debt faster. One way to do this is calculate the amount that you save exclusively from taxes and deposit it biweekly along with the ongoing EMI. This might seem insignificant in the short run but saves you almost 3-4 months during the final payment which results into about 25-30% lesser interest being paid.
5) Accelerate your payments by adding very small amounts:
This is the best of all strategies. Even if you add ~100 extra every month for just 2 years consistently, you can save up to ~20,000 in interest and you will end up finishing an 110 month loan in 106-107 months saving 4 months.
6) Pay off some part using bonus:
Every year, you will get bonus at the end of the year. You can use this bonus to pay off part of your loan.
The key is to plan and stick to the model that you have decided. Once you are earning in lakhs, a few thousands in the long run won’t matter.
Calculate when to pay off your education loan
Once you take the loan, you have to start planning how you would pay it off. Should you wait for the entire loan tenure or pay it off before that? How much money will you save and how much tax benefit will you forgo? And as such how much tax would you save through this loan?
Check this calculatorOpens in a new window for answers to all these questions.
1) A1-11 are input cells. Enter the details of the loan you have taken here.
2) Once you enter the data, you will see that excel will calculate the formulae and fill the columns E to L with data.
3) Column G indicates the tax you would save every month if you keep paying EMIs.
4) Column H indicates the total value of the entire tax benefit you would forgo if you pay off the loan in corresponding month. This is basically the current value of all the tax savings you would have got in the future.
5) Column I is the prepayment penalty for paying off the loan.
6) Column L is money saved by paying off the loan early.
7) There are two graphs that show money saved if you pay early. The first graph shows two lines rad and blue. Actual money saved is the difference between these two lines.
8) The graphs clearly show that you would get maximum benefit by paying off the loan as early as possible. i.e. the tax benefit forgone and prepayment penalty by paying off the loan does not exceed the interest saved by paying off the loan.
Source: https://freefincal.com/paying-off-education-loan-in-india/
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