While
everybody wants their child to have a good education, Indian parents are
especially intent on achieving this goal. So focused are they that they are
willing to scrounge on basic indulgences to save for their kids' college fees.
The problem is that in their efforts to fulfill the needs of the child, they
sometimes sacrifice more than they should. They dip into their retirement funds
to pay for the education. This is a dangerous strategy because it leaves them
financially vulnerable in their sunset years.
We
all know that the cost of higher education is rising at a fast pace. Unless you
foresaw this trend 10-12 years ago and started investing aggressively for this
goal, your savings alone might not be enough to fund your child's higher
education.Instead of withdrawing from your Provident Fund or PPF, it's better
to bridge the gap with an education loan. It is not only tax-efficient, but
helps inculcate financial discipline in the child education plan by making him
responsible in his early working years.
It
may be argued that taking a loan in these times of high interest rates is not a
prudent strategy. You will be paying 12-14% on the loan, while your investments
earn only 8-8.5%. However, keep in mind that any loan taken to pay for the
education of your child is eligible for income tax benefits.
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 (see table).
The
higher the taxable income of the individual, the bigger the tax benefit. For
someone in the highest 30.9% tax bracket, a loan taken at 12% per annum
effectively costs 8.71% a year. This is very cheap considering today's regime
of high interest rates, wherein personal loans are available at 18-20%.
Also,
unlike a home loan, where the tax deduction for self-occupied houses is limited
to Rs 1.5 lakh in a year, there is no limit to the tax deduction on an
education loan. However, keep in mind that most lenders don't give education
loans of more than Rs 10 lakh, so a limit is set by default. An education loan
will also help in making your child financially responsible in his early
working years. 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.
In the initial years, when the financial responsibilities are few, young people
tend to be extravagant.
However,
if you shift the burden of repaying the loan to your child
education plan, he will be more careful with his money and is
less likely to blow it up at a discotheque or on gadgets and gizmos. The loan
EMI will act as a deterrent and force him to be frugal in his spending.Though
all nationalized banks offer education loans, not many people are aware of
them. Here are a few things you should 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 or children.
The interest paid on loans taken for siblings or other relatives is not
eligible for income tax deduction.
Collateral requirement: If the loan is more than Rs 3-4 lakh, the lender may insist on collateral
as security. This could be immoveable property, National Savings Certificates,
fixed deposits, bonds and endowment insurance policies. This is a necessary
formality and one should not shy away from providing the collateral.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
if the loan has been taken from a private source or an overseas lender. Some
charitable institutions are also included in the approved list.
Courses covered: full-time graduate or post-graduate courses in engineering,
medicine, management, applied sciences, vocational studies after senior
secondary or its equivalent are eligible for education loans. This can be from
any school, board or university recognised 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 it in 2013, the interest deduction
will not be allowed after 2021.
[Source: http://articles.economictimes.indiatimes.com/2011-05
23/news/29568999_1_education-loan-personal-loans-higher-education]
