Pursuing quality education lays the solid foundation for a successful and financially secure future. However, the rising cost of studying in well-ranked universities and colleges often presents financial challenges. To cover these educational expenses, many students choose education loans.
But, does an education loan have interest rates and terms that can potentially affect your repayment capacity? To answer this question, let’s start with understanding how interest rates work. This article will take you through the specifics of interest rates associated with education loans so you can understand the fine print and, ultimately, make an informed decision.
Does an education loan have interest?
Yes, all types of loans feature an interest component. The interest rate is the percentage of the loaned amount the lender charges as the cost of borrowing. This rate is calculated on an annual basis. For example, if you take a loan of INR 10 lakhs at an interest rate of 12% per annum, you will have to repay an additional INR 1.2 lakhs in interest along with the original principal amount of INR 10 lakhs.
Does an education loan have an interest calculation method?
To understand how interest rates work, it is important to answer the question: “Does an education loan have interest rates that can change?”
Education loans can feature either a fixed or a floating interest rate. While floating interest rate changes with shifting market conditions, fixed rates stay constant throughout the tenure of the loan. Typically, education loans are offered at a floating rate.
Additionally, a lender may calculate interest based on simple or compound interest calculation. In either case, the calculation will be as follows:
1. Simple interest
Simple interest is calculated on the principal amount of the education loan. It is calculated using this formula:
Simple Interest = Principal x interest rate x time period
For example, if the loan amount of INR 1 lakh is disbursed for a tenure of 3 years at a 10% simple interest rate, the interest calculation will be:
INR 1 lakh x 10% x 1 year = INR 10,000
Year 2 interest = INR 1 lakh x 10% x 1 year = INR 10,000
2. Compound interest
Lenders calculate compound interest on the principal amount and the accumulated interest. It is calculated as:
Compound interest = Principal x (1 + interest rate/ compounding rate) ^ compounding rate x tenure
Say, you’ve taken a loan of INR 10 lakhs for 2 years with an interest rate of 7%. The calculation will then look like this:
10 lakhs* (1 + 0.07/1) ^ 1*2 = INR 10,14,049
Thus, your total interest obligation for the loan’s tenure will stand at INR 14,049.
Do student loans have interest payments during grace period?
Unlike other types of loans, education loans feature a grace period - the time between the end of the course and the start of the loan repayment. This means that you don’t need to start paying EMIs immediately but at a later date once you start to earn. A common question while selecting a lender is, “Does an education loan have interest to be paid during the grace period?” Well, there are two types of grace periods offered by different lenders:
1. Grace period with interest payment: Under this option, the borrower needs to pay interest on the disbursed loan amount, either fully or partially. The principal repayment starts only after the grace period is over.
2. Grace period without interest payment: Here, the borrower is not required to pay any interest during the grace period. The interest keeps accumulating and gets added to the principal once the grace period ends.
Does an education loan have interest-based tax benefits?
Apart from helping you move ahead in your career, education loans also help you with tax benefits. The interest paid on education loans is eligible for tax deduction under Section 80E of the Income Tax Act. Here is how it works:
1. The tax deduction applies only to interest payments, not to the principal loan amount. Moreover, there is no upper limit on the total interest amount eligible for tax deductions.
2. The tax benefit on education loans is available for up to 8 years from the start of loan repayment or until interest is paid off, whichever is earlier.
3. To claim this deduction, a certificate is required from the lender showing interest and principal breakup of EMIs.
Is interest rate important while comparing lenders?
Education loans provide the required financial assistance for higher studies. A common question students ask when exploring different financial institutions is: Do student loans have interest rates that vary across lenders?
Understanding whether a financial institution offers low-interest student loans can have huge implications on your total repayment burden. In addition to finding student loans with low interest rates, ask questions about the prepayment charges, hidden charges and the total loan amount that can be borrowed.
Finally, it is important to note that with longer tenures, your EMIs reduce but the total interest payable increases. If you are confident of securing a well-paying job after the completion of your course, it is better to opt for shorter tenures. While this would mean slightly higher EMIs, you will be able to repay your loan quicker. However, to make the right decision, strike a balance between your repayment capacity and the tenure.
Apply for flexible education loans with Tata Capital
Education loans are an excellent way to finance your higher education without straining your finances. With Tata Capital, you benefit from competitive interest rates, an easy online application process, and zero prepayment charges on education loans. We offer loans that can cover your tuition fees, boarding expenses, accommodation expenses, stationary, and other costs. Apply now for an education loan with Tata Capital to move closer to your dream institution!
15 February 2024
5 mins read
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