Why Indian students studying abroad should try and avoid education loan?

Business

oi-Sunil

By Sunil Fernandes

Published: Tuesday, July 1, 2014, 13:40 [IST]

The problem with education loans in India as compared to other set of loans is that you do not begin payment of the loan immediately, like personal loans, auto loans, gold loans etc.

What this means is that interest rates get added-up making the EMI break-up very steep. A PSU bank in India tends to ask for the education loan repayment six months after getting a job or 12 months after completion of the course whichever is earlier. Now, if you are an Indian student doing a three-year course studying abroad and end up getting a job six months after the course, you would have to pay interest on the three and half years.

Let's now work this with an example

The State Bank of India (SBI), whose education loans are amongst the cheapest in the business is currently offering an interest rate of 13.5 per cent on one of its Student Loan Schemes. Let's assume you have taken a loan for Rs 10 lakhs to pursue your studies abroad.

Now, after three and half years, the interest itself would be a cool 4.72 lakhs. This means once you have got a job, you begin paying Rs 14.72 lakhs, as principal and interest amount outstanding.

In a normal loan you would start paying immediately which would reduce your liability, as you are also paying part of the principal amount.

Then there are other costs involved. In a reputed private bank a delay in EMI would cost a huge interest rate of 24 per cent per annum. On the other hand there is also a problem if you prepay your education loan. Some banks charge a pre-payment charge of 4 per cent on the outstanding amount, which is really steep.

All in all taking an education loan itself is a big problem. In fact, if you can avoid the loan it would be a great boon, than going for one.

Tax Exemption on education loans

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