FINANCIAL PLANNING: Interest on student loan is tax exempt

Studying in a premier institution in India is expensive. It is even more expensive if the student opts for a foreign university. Though there are quite a few scholarships and monetary grants available, but not all students are able to secure them. This makes it obligatory for many students to opt for an education loan. Here are a few tips you can follow if you are applying for an education loan:

Apply in advance

Loan processing takes time due to the documentation process, which is then followed by the approval from the bank or lending institution. Hence, you should not wait for the admission confirmation from your desired educational institution, but instead, apply beforehand. In fact, applying for the loan proactively will save the last-minute hassle.

Check the loan eligibility for your desired course

While you are clear about the course you want to purse and from which college or university, you also need to check with banks and other loan providers about whether they offer loan for that particular course and/or educational institution.

Be careful about the paperwork

Arranging and collating the requisite set of documents beforehand can help you get the loan easily and faster.

Should you pre-pay your education loan

You should do a thorough cost-benefit analysis before pre-paying your education loan. Remember that pre-payment may involve a penalty. You may also want to check with your bank about starting the repayment of interest while you are studying, to lower your Equated Monthly Installments (EMIs) at a later stage.

Compare interest rates offered by various lenders

The interest rates vary from lender to lender. So comparing interest rates between banks and financial institutions and opting for the best can affect your cash outflow significantly. Apart from that, you can also negotiate the processing fees and other charges, if any, to save yourself some good amount of money.

Check special benefits, if applicable

If you are a woman, differently-abled person or someone belonging to a specific strata of society, then you may get a slightly lower rate of interest than the regular interest rate. Be aware of that.

Understand the tax benefits

Your education loan offers you a tax benefit under Section 80E of the Income Tax Act, which provides for the deduction of full interest on your loan from your taxable income. The important point to note here is that there is no deduction available towards principal amount which you pay towards your education loan.

What happens if you default in repaying

You need to check the repercussions of not paying off the loan at all or not paying off the loan same as per the schedule. Sometimes, informing the lender on time can help get you more time for the payment. Apart from that, your guarantor needs to make the payment in case you default. Your credit score will also get affected severely.

Read the loan document carefully

We have been taught since our childhood about reading every document carefully before signing it. However, people often forget this basic but important rule and end up signing documents without checking them in detail. To avoid shock at a later stage, check some important points like the interest rate and payment structure, penalties and conditions for pre-payment, the disbursement process, etc.

The writer is chief gardener at Money Plant Consultancy