Student Loans or Education Loans as they are termed within the country are financial loans given out by banks to individuals studying in college in order to cover the expenses of tuition fees, hostel fees, and other student-related expenses. These loans are generally offered at a low-interest rate of about 10% to 13% depending on the Bank being approached for the aforementioned Student Loan. Educational Loans are a great way for students to ease the pressure that college expenses exert on them, however, it is no secret that many students and individuals, in general, do not possess a great deal of knowledge on how these loans work and how they are supposed to function. Therefore, in order to clear up some of the commonly asked questions and the more frequently stated doubts about student loans, here are some of the most misconceptions about student loans:
1. The Limit for a Student Loan is 7.5 lakhs if the individual is seeking higher studies within India: According to RBI rules, the maximum amount an individual can borrow for college purposes cannot exceed 7.5 lakhs if the institution is situated within India and is 20 lakhs if the institution is based abroad. Some banks allow higher amounts to be borrowed if some sort of collateral such as property, LIC, NSC etc is provided on the part of the individual.
2. Student Loans cannot be used for any college-related purpose: Banks only offer the financial coverage of a few types of expenses that can arise from college:
Tuition Fees Payable to the college
Purchase of books/equipment/uniform
Vehicle charges (in a few cases)
Health Insurance (in a few cases)
Expenditure such as fines and leisure activities are generally not covered by Student Loans. However, loopholes do exist that allow you to borrow money from the bank for these purposes.
3. Repayment of the Loan can be done over a period of 15 years: The general rule of thumb is that students are given a moratorium period of 6-12 months after their education is completed before paying off the loan or are expected to start paying off the loan immediately after they have received a paying job depending on what comes earlier. During this moratorium period, no penalties are incurred for late payment. However, after the moratorium period is completed, students are required to pay off all debts within a repayment period of 15 years.
4. Interest paid on Student loans is eligible for Tax Rebate: Under Section 80E of the constitution, Interest paid on Student loans can be filed with the government and can partially be claimed as the rebate. However, this is only limited to the first 8 years of Loan repayment and interest paid beyond the 8th year mark cannot be claimed as the rebate.
5. There are Additional Bank Charges which can add to the cost of Loan Repayment: Costs such as processing charges, Late-payment charges, and instruction charges can rack up extra expenses for the borrower. For example, HDFC Bank offers the “HDFC Bank Education Loan” for students for which there are charges such as Prepayment charges (4% of outstanding Loan), Processing Charges (1% of loan amount) as well as instruction return charges (Rs. 500 per payment). These types of expenses can add to each other quite quickly and cause the borrower to pay much more than expected. Therefore, it is important to note that students should be wary of such charges when taking out Student Loans.
6. Taking a Student Loan may make you eligible for discounts on other services: Financial services provided by banks such as insurance, mutual funds, investment opportunities etc are also commonly offered at a discount to students who utilize the bank for an Education Loan. It is important to inquire about such options during the process of obtaining the Loan.
7. Student Loans are meant to cover roughly 80%-90% of all college expenses: Students are generally expected to be able to cover some of the expenses with their own monetary resources and the loan given by the bank should only be used to cover the essential expenses that are incurred by the given student.
8. You must provide proof of admission as well as proof of tuition fees to be eligible for a Loan: Contrary to popular belief, Banks do not give out student loans freely and require a large set of documents and formalities to be completed. Some of these include
Clearing entrance exams and showing required proof
Must be seeking a course in a recognized university
Proof of age
ID and address proof
Bank statement for the previous 6 months prior to taking the loan
For courses that are abroad and being pursued, Visa and valid Passport is required.
There are several other documents that are requested for as well which is dependent on the Bank from which the loan is being solicited.
9. Prepayments can largely benefit a Student: Though Banks do offer a relaxation period after the course is completed and even do not require you to start paying the loan off during the course, it is usually recommended that the Student attempts to pay the loan partially during the repayment phase. This will reduce the financial burden on the Student as well as lead to lesser costs and service charges in the future in the case of service charges being based on the outstanding amount of the loan.
10. Banks charge Simple Interest on Student Loans: In order to lessen the financial burden of Student loans on the students itself, banks have adopted the method of charging simple interest which remains uniform throughout the tenure of the Loan. This means that no extra interest is added and compounded interest values are avoided entirely, making Education Loans relatively low risk as compared to other financial tools offered by banks.
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