Education Loan Or Self Finance?

May 31, 2011     Posted under: Investment

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Almost every parent wants their child to have a good education and they try every bit to achieve this goal.  The problem in their efforts is that more often sacrifices are more than what should have been. They are even ready to make use of their retirement funds to pay for the education, which makes life financially vulnerable in their later years.

Seeing the past trend the cost of higher education is rising at a very fast pace. If you are smart enough then you will start investing for your child education much earlier and if you missed the train then the chances are that your savings alone might not be enough to fund for education. Instead of withdrawing funds from EPF or PPF, it’s better to bridge the gap with an education loan. This is not only tax-efficient but helps in inculcating financial disciplines in your child in his early working years.

Although it can be argued that availing for an education loan with an interest rate hovering around 12-14% is not a prudent strategy considering that investments will only offer returns 8-9%, but one thing which is being missed is the eligibility for tax benefits in case of education loan.  Under Section 80E, the entire interest paid on the loan is eligible for tax deduction. The savings in tax can drastically bring down the effective cost of the loan.

The higher the taxable income of an individual, the bigger is the tax benefits. For someone falling under highest 30.9% tax bracket, a loan taken at 12% per annum effectively costs 8.71% a year, you can clearly make out the differences.

Also, unlike a home loan, where the tax deduction for self-occupied houses is limited to Rs 1.5lakh in a year, there is no limit to the tax deduction on an education loan.

Education loans usually come with an EMI holiday and the repayment can be deferred for up to 1-2 year till the student has taken a job.

Although all nationalized banks offer education loans, not many people are aware of them.  Here are few things one must know about this form of borrowing:

Eligibility For Tax Deduction: You can avail of income tax deduction for the interest under Section 80E only if the loan has been taken for yourself, spouse of children. The interest paid on loans taken for siblings or relatives is not eligible for income tax deduction.

Collateral requirement: If the loan is more that Rs 3-4 lacs, the lender may insist on a collateral as security. This could be immovable property, National Savings Certificate, FDs, bonds and endowment insurance policies.

Specified lenders: If you are seeking tax deduction, the loan should be from a bank or financial institution notified for the purpose. No tax deduction is available on loans taken from a private source or an overseas lender.

Courses Covered: Full-time graduate, or post-graduate courses in engineering, management, applied sciences, vocational studies after senior secondary or its equivalent are eligible for education loans. This can be from any institute recognized by the central or state government.

Interest deductible for eight years: Unlike a home loan, the interest deduction is available for a maximum of eight years. If you take an education loan in 2011 and start repaying in 2013, interest deduction will not be allowed after 2021.

Be Smart and Make Your Decision Smarter !!

NitiN Kumar Jain

Nitin works in an IT MNC professionally but blogs and owns NKJ Live. He is also the co-owner of a professional start-up ARGHAM BYTES

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