By Jiten Parikh
FINANCING your child's dream is tough job. But, today, there are some smart ways to finance your child's education and make his dream a reality.
Take education loan
Banks offer education loan to students. However, the loan amount depends on which course you want to pursue and the geographical location of the School/University.
Pros: Education loans have an initial moratorium till the child secures a job. Some offer the facility to start repayment after a pre-specified period from the completion of the course.
Flipside: is that these loans come with the risk of interest rates.
Floating interest rates! What's that?
Commonly, education loans are offered with floating interest rates. Floating rate differs from bank to bank. The thing about floating rate is when interest rates move higher, you pay a higher Equated Monthly Installment (EMI), or the loan tenure gets extended.
How does this interest rate work?
1. When will the interest rate change?
Interest rate changes at a fixed period of time, typically, every quarter or monthly. This is mentioned as the review date, and is specified when you sign the loan agreement.
2. How will the interest rate change?
Interest rate offered is based on a base rate, which is a pre-selected internal rate. The base rate changes due to changes in the interest rates in the economy. So, if interest rates in the economy rise, the base rate is bound to rise.
3. By how much will the interest rate change?
There is a spread or margin on this base rate. A spread/margin is the percentage added or subtracted from the base rate. This is to cover your bank's administrative and other costs.
For example -- Bank's Retail Prime Lending Rate (RPLR) = 10 per cent. The interest rate offered to you for education loan is = RPLR - 1 per cent = 9 per cent. It could also be = RPLR + 0.5 per cent = 10.50 per cent. This is the bank will decide based on various factors.
4. How will it affect me?
When you take an education loan with a floating rate, you have two options.
Option 1: The rate of interest increases or decreases, but you keep the tenure constant. In that case, the number of years you take to repay the loan stays the same but the EMI increases or decreases.
Option 2: When the rate of interest increases, you can extend the tenure. In that case, the number of years you take to repay the loan increases but the EMI stays constant.
Similarly, when the rate of interest decreases, you can reduce the tenure of your loan. This is a very important factor which can lead your educational loan repayment plans haywire if interest rates shoot up.
Read: Funding for senior research students
Calculate: How much education loan will you get?
Read: Take a study loan
Photograph: Vipurva Parikh
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