Education loans do offer tax benefits and easy repayment norms, however they come with some limitations where a top-up loan scores.
Your all-grown-up son or daughter is finishing school and is raring to fly abroad. After all, the foreign university where he or she had always dreamt of studying at has finally accepted his application. So, you have done your homework as parents and explored all the education loan products in the market. Or, have you?
Education loans certainly one time-tested option to fund your child’s dream education, but there are other equally viable options today. Like top-up loans.
What is a top-up loan?
A top-up loan is an add-on to a home loan, considering the appreciation of the property price over the time. If you already have a home loan with any bank, have paid a minimum of 6-12 EMIs, and have a healthy repayment track record, you can apply for a top-up loan. There are no additional documents required when applying for a top-up loan. All you need to do is to walk in to the bank where you have home loan, and hand over your latest payslip and bank statement to request for a top-up. The bank initiates a technical evaluation of the property already mortgaged with them, and the loan is disbursed to your account within 48 hours in most cases.
Education loan versus top-up loan
Education loans are specifically crafted loans for students, but borrowers are free to make their choices weighing the pros and cons of various loan types, to get the best for their individual needs. Here is how education loans stack up against top-up loans when they go toe-to-toe.
Interest rate: Education loans often come with interest rates ranging from 12% to 17% (on an average), while a top-up loan is just 0.5% to 1% above your home loan rate, that is, at around 11% to 14%. In case a top-up loan turns out to be cheaper, it can actually reduce the interest outgo on your child’s higher education.
Repayment: The tenure of a top-up loan can be the same as that of your home loan, which means you can combine its repayment along with the home loan equated monthly installment (EMI). So considering its stretchable tenure, the monthly outflow will tend to be less. For instance, if you need a loan of Rs 6 lakh and have been offered both top-up loan and education loan at 12% interest rate, the two options shape up differently when you consider your monthly outgo in each. Top-up loans of 6 lakhs for a period of 15 years come with anapproximate EMI of Rs.7,201. The maximum possible tenure for an education loan is 8 years. So, the same loan for 8 years tenure would require you to shell out Rs.9,752 per month – almost a third more than the top-up loan option.
Total cash outflow: Continuing with the above example, for an education loan, the total cash outflow including the interest will be Rs.9,36,163 (without considering Pre-EMI, as it depends on whether you opt for moratorium period or not). A top-up loan, on the other hand, would require an outflow of Rs. 12,96,182. But, assuming you can build a corpus over 8 years, if the top-up loan is pre-closed in the 8th year, you can save around 2.7 lakhs in interest outgo for the balance tenure. This way, the total outflow does not differ much between the two loan options, but a top-up loan can be easier on your wallet as it provides the flexibility of lower EMIs while allowing any accrued savings over time to be redirected towards a pre-closure.
Ease of applying: It is easy to apply for a top-up loan as compared to an education loan, as exhaustive paperwork is not involved unlike an education loan where, along with heavy paperwork, you may need to produce security and guarantors in some cases.
When should you consider an alternative to education loans?
You are not eligible for an education loan: Not all educational courses are approved by banks. For instance, you may not get a loan for an online course. A top-up loan comes to your rescue here.
You need better interest rates: The higher total outflow in case of a top-up loan can be preempted if you pre-close it sooner by building a corpus. Whereas, an education loan can be a costlyaffair considering its higher interest rates.
You need more money for the miscellaneous education-related expenses: Education loans cover only the course fee if you are pursuing education in India. But, other related expenses like capitation fees have to be borne out of your savings. Sometimes education loans come with a ceiling on the amount that can be sanctioned. However, with a top-up loan, you can apply for a higher amount considering your existing home loan, income and the property's prevalent market value.
On the down side, top-up loans do not have tax benefits unlike home loans. Education loans, on the other hand, offer deduction under Section 80E for interest paid. In a top-up loan, the repayment begins immediately. With an education loan, you can wait for a certain period to start re-payment if you can sit easy with the accumulating interest.
Finally, education loan or top-up loan – the choice is yours. Ultimately, it is a toss-up between friendlier EMIs and higher loan amounts on the one hand, and repayment flexibility and tax rebates on the other, but what should matter is that you have given your child the future he or she deserves.