Education loans are expected to become cheaper. The government is planning to pay the interest for the duration of the academic programme for which the student has taken the loan.
The government is considering a proposal where between joining a course and its completion will be a moratorium period, during which the student will not have to pay interest. This will significantly bring down the EMIs.
The proposed interest rate subsidy from the government will also benefit banks which have been complaining of defaults and non-payments on education loans. It is estimated that around 2-3 percent of education loans have turned sticky. So far, the public sector banks have given Rs 32,000 crores in education loans to 16.99 lakh students.
Typically, a student starts paying his EMI a year after completing his studies. One year moratorium is aimed at giving students time to search for a job.
Under the proposal being considered by the government, if the education loan is for seven years, which includes two years of study and a moratorium of one year, the interest cost for the first three years would be borne by the government while the student has to repay the principal and interest components for the remaining four years.
In the last budget, the finance minister had announced the government will provide an interest subsidy. The interest holiday will be given only to students whose parents jointly earn a gross income of Rs 4.5 lakhs or less. The income of parents will have to be certified by State and Central government officials.
The proposed subsidy will be with retrospective effect. Thus, all students (where parents' gross income is less than Rs 4.5 lakhs) and who had borrowed last year will benefit from this. The interest rate subsidy will be for technical and professional courses offered by institutes in India.
As such, it could cover around 80 percent of the loans taken by students and may cost the government Rs 500-1 ,000 crores a year. The government is also thinking of capping the loan amount at Rs 10 lakhs.
The government had appointed Canara Bank as the nodal bank for this scheme. All other state sector banks providing education loans to students will have to make a claim to Canara Bank, which will be the government's agent for distributing the subsidy money.
Banks have also asked the central government to guarantee education loans, at least those below Rs 4 lakhs. Students availing education loans up to Rs 4 lakhs do not have to provide any security or guarantee. However, the government has directed state-owned banks not to reject any education loan without a good reason. Since loans below Rs 4 lakhs are perceived riskier, banks have sought a government guarantee.
In addition, the government has extended tax concession on interest paid for educational loan to all streams of studies, including vocational courses, benefiting students from all economic strata opting for higher studies, from this academic session onwards.
The concession was till now restricted to graduate and post-graduate courses in engineering, medicine, and management, and postgraduate courses in applied sciences or pure sciences, including mathematics and statistics.
The latest amendment in Section 80E of the Income Tax Act will bring all the streams of education (apart from regular ones) and vocational courses under its ambit. This will benefit the students who apply for graduate and postgraduate courses in various streams during the upcoming academic session.
The tax concession on such a loan will also be extended to parents who have legally adopted a child. This makes student loans cheap and easily available.