As the horizon for higher education expands in India and participation of private educational institutions increases for quality education, the cost of education is increasing rapidly. In fact, the cost of education at renowned institutions is already exponential. And as per some estimates the cost is increasing at the rate of 15% per annum or even more.
While many parents, who want to provide their children with the best possible education, invest their savings in different savings instruments like mutual funds (MFs), fixed deposits (FDs), unit-linked insurance plans (ULIPs), etc., for the long term, but many times this too might not be sufficient to meet the educational expenses, hence the option readily available to bridge the gap is education loan.
What is an education loan?
This is a special loan given out by banks and other financial institutions for educational purposes and it includes the basic course fee and other associated expenses such as (college) accommodation, exam and miscellaneous charges.
A student is the main borrower with a parent, spouse or sibling being the co-applicant.
These loans can be availed for a full-time, part-time or vocational course as well as graduation or post-graduation courses in the fields of medical, engineering, management, architecture, hotel management, etc.
Vidya Laxmi Scheme
A portal for students seeking Education Loan known as Vidya Lakshmi has been launched by the Government of India. This portal has been developed under the guidance of the Department of Financial Services, (Ministry of Finance), Department of Higher Education (Ministry of Human Resource Development) and Indian Banks Association (IBA). Students can explore, apply and follow the education loan applications to banks at their ease by accessing the portal.
The important features of Vidya Laxmi scheme are as following:
• The scheme extends loans up to Rs.7.5 lakh for studies in India and up to Rs. 15 lakh for studies abroad.
• No surety or margin is required and the interest rate is not to exceed the Prime Lending Rates (PLR) for loans up to Rs. 4 lakh and for loans above Rs. 4 lakh the interest rate charged will not exceed PLR plus 1 percent.
• The repayment period is of 5 to 7 years with provision of grace period of one year after completion of studies
Tax Benefits for the Parents
The repayment of an education loan is deductible under section 80E of the Income Tax Act. The yearly limit for deduction is Rs. 40,000 (for both the principal and the interest). Only loans taken for higher education - full-time studies in any graduate or post-graduate, professional, and pure and applied science courses - may claim the deduction. The deduction will be available for a maximum of eight years starting from the day you start repaying.
This article was updated on May 2020.
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