Education Loan Interest Rate

Getting a good education is an important foundation for success and for making sure that your financial future is secure. However, the price tag of higher education has been gradually climbing, making it difficult for most students and families to meet tuition, housing, and other expenses. To support this bill, students most of the time make use of something called education loans, which will help them gather the required amount of money to continue with their studies without putting that much financial burden on their pockets.

Education loans are a preferable option to finance higher studies, but it is important to understand the given terms and conditions behind it, and the interest rate and payment plan as such. This led many students and parents to wonder whether education loans come along with interest rates, and how they affect the total repayment amount. In the article, you will learn all about the interest rates on the education loans, including the methods of calculation, the grace period, tax benefits, and the aspects to consider while comparing lenders. Armed with this knowledge, borrowers can make financial decisions and pick the best loan option for their individual circumstances.

Education Loans: Do They Have Interest?

I mean all loans, even education loans, have an interest element. Interest is the percentage of the principal amount that the lender charges the borrower as the cost of borrowing money. This rate is usually expressed on an annual period basis and tremendously affects the amount that needs to be repaid.

For instance, if a student takes a loan of INR 10 lakhs with an interest of 12% p.a., then they have to pay INR 1.2 lakhs as interest every year, in addition to paying back the principal amount. It is important to know how this interest is calculated and applied to manage loan repayment.

Types of Interest Rates on Education Loans

Education loans can be available on fixed or floating interest rates.

• Fixed Interest Rate: This rate stays same over the period of loan. The benefit of a fixed interest rate is that it gives borrowers predictability regarding their EMIs (Equated Monthly Instalments), so they can plan their finances accordingly. On the other hand, when interest rates in the market decrease, a fixed rate loan borrower does not enjoy the decreased rates.
• Floating Interest Rate: This interest rate varies with dynamic market conditions or economic factors since it is connected to a benchmark rate like the repo rate or Marginal Cost of Lending Rate (MCLR). Although Floating rates may dip more than fixed, they may also increase resulting in a higher total repayment amount.

Interest on Education Loans: Methods of Calculation

There are two primary ways lenders calculate interest on education loans: simple interest and compound interest.

1. Simple Interest

With simple interest, interest is calculated just on the principal loan amount. Simple interest formula:

Simple Interest = Principal × Interest Rate × Time Period

For instance, if a student avails a loan of INR 1 lakh for 3 years at the rate of interest of 10%, its calculation will be as follows:

• Year 1 Interest = INR 1,00,000 x 10% x 1 = INR 10,000
• Interest for Year 2 — INR 1,00,000 x 10% x 1 = INR 10,000
• Year 3: Interest: INR 1,00,000 x 10% x 1 = INR 10,000

Interest payable per annum = INR 10,000.

2. Compound Interest

In contrast, compound interest is the more complex and potentially rewarding type as it is calculated on the initial principal, which also includes all of the accumulated interest from previous periods. Here’s the formula for compound interest:

Compound Interest = P x (1 + Interest Rate/Compounding Frequency) ^ (Compounding Frequency x Tenure)

Suppose a student takes an education loan of INR 10 lakhs for 2 years at the interest rate of 7% per annum (compounding annually), a calculation of it would be:

INR 10,00,000 x (1 + 0.07/1) ^ (1 x 2) = INR 10,14,049

Total interest paid throughout the tenure = INR 14,049

Compound interest leads to an increased amount paid back as compared to simple interest, which is why it is important to find out which method a lender uses before you sign up for an education loan.

Do You Accrue Interest During the Grace Period?

Education loans differ from other types of loans in that they come with a grace period. It is to give borrowers time to graduate and get a job for that period between completing the course and repaying the loan. Whether interest accrues during that time, though, ultimately depends on the lender’s terms.

Lenders generally provide two variations of grace periods:

1. Grace Period with interest Payment: Under this option, the borrower is required to pay interest on the disbursed loan amount during the grace period. The principal repayment starts only after the grace period ends.
2. Grace Period free of Interest Payment: In this case, the borrower does not have to pay interest during the grace period. However, this unpaid interest adds to the principal and increases the overall repayment burden once the grace period expires.

Are There Tax Benefits on Education Loan Interest

Tax Benefits of Education Loans: One of the benefits of an education loan is tax benefits. Section 80E of the Income Tax Act allows you to claim a tax deduction on the interest payment on education loans. Here’s how it works:

1. Note that the deduction only applies to the interest portion of a loan, not the principal.
2. There is no cap on the amount of interest that is deductible.
3. The tax benefit is available for a fire of 8 years from the end of the computation of interest paid or when interest is paid off completely, whichever is earlier.
4. Borrowers will have to procure a certificate from the lender to avail of this deduction, along with a breakdown of interest and principal consolidation of EMIs.

How to Compare Interest Rates from Different Lenders?

While selecting an education loan, students usually ask, “Is the rate of interest on student loans different for different lenders?” The answer is yes. The interest rates offered may vary greatly between banks, NBFCs, and other financial institutions.

Although it’s always best to lock in a loan with the lowest possible interest rate, borrowers should weigh other factors as well, including:

1. Prepayment Charges: Some lenders also charge a penalty fee for prepayment.
2. Processing Fees: These are institution-dependent and influence the cost of borrowing.
3. Undisclosed Fees: Scrutinize the terms to look for any hidden fees.
4. Loan Cap: Check that the lender provides adequate money to pay for all education costs.

Conclusion

Student aspiring to continue higher education loans are a helpful financial instrument. Understanding interest rates, how they are calculated, grace periods, tax benefits and comparing lenders is vital to making the right decision. By thoroughly analyzing these factors, students are able to select the most appropriate loan option that reduces financial burden but also helps them in pursuing chairs in their desired educational institutes.