Tagged: Education Loan

ATM :: Financial Slavery: Do you really need a loan-free life?

Sukanya Kumar, Founder & Director, RetailLending.com | Aug 12, 2016, 10.28 AM | Source: Moneycontrol.com
The more we become ‘social’, the more we tend to show-off. It leads to more bad loans. It is time to shun bad loans and embrace good loans wherever required.

ATM

This is a very sensitive subject. Most of us in the financial broking business will shiver thinking what will happen, if this ever comes to of no one borrowing anymore. But let us overcome this superficial personal gain agenda and see what lies beneath.

A man in his late 20-s or early 30-s is bound to have a couple of small loans like credit cards, personal loans etc. here and there. They may be for shorter periods. As he progresses well in life and gains stability in his profession, he wants to settle himself. A big part of this ‘settlement’ is buying a home. And a home loan is generally taken for 20 years by most.

Given the current property prices across the world, buying a home with your own savings and liquidating your financial papers is not a possibility. You are bound to fall short way beyond the market price. Gone are those days when a man used to build a home with his retirement benefits and borrowing only from his provident fund account. He never used to enjoy the home fully as he has spent his hay-days staying at a rental home/company accommodation which never was his ‘own’.

The more we become ‘social’, the more we tend to show-off. If my colleague has got something which he boasts about, we have to get the better ones to overtake him. Our home-maker (to the true sense) spouse wants to buy a home with more number of bedrooms and amenities, her neighbouring friend could afford. Even our teenage children want to buy better gadgets to make sure they have their friends’ groups flocking around them and think they have the ‘latest’ ones.

There is no end to these needs, no end to loaning to purchase these, and hence the terms ‘financial slavery’. A man pays 70% of his net take home salary to pay off his monthly loan EMI-s and needs to survive with the balance 30% only, and with this lean sum pay for his home rent, children’s education and their extra-curricular activities, day-to-day expenses, food, clothing, entertainment, hobbies and also family trips and shopping.

We are afraid to start our own venture; afraid to opt for a better opportunity, if it requires us to take a study-break for a couple of months, we are even afraid to get married these days (I hear it from many 30-somethings frequently), since we are afraid to take more responsibility, given that we are already under so much debt.

Now, all of it is not that bad. There are two clear groups of loans. The good loans and the bad loans. One needs to let go of the bad loans to relieve himself / herself from being miserable, and continue happily with the good loans and feel good to have them.

Bad loans:
Any item, bought with loan-money, which depreciates in time, is a bad loan. You never recover the sum you paid, plus you pay the interest on that sum too.

For example, you buy clothes or any electronic gadgets via a consumer durable loan or you buy a car with a car loan, or you buy just some books by swiping your credit card…….. The moment you are walking out of the shop, it depreciates by 30-50% to the least. It becomes a ‘second hand’ item. You never regain the price, unless of course your car becomes a vintage one and pays off (pun intended).

So, a loan on credit card, a personal loan, a consumer durable loan, a car loan- all these are bad loans. It only boosts your ego and gifts you a ‘rich’ lifestyle and only brings momentary joy with no permanent effect on yourself.

Good loans:
A loan which enhances the worth of the purchased product over time and even crosses the mark of it, to give a handsome return over the period, also absorbing the interest cost attached to it.

A home and an education loan are in this category. A home always appreciates in price, if bought wisely with proper research in good location, and will supersede the interest cost too. The percentage of people making a true loss while selling their property is negligible.

The added advantage of taking a home loan is also the tax benefit you get under a couple of sections. There are subsidies available on affordable housing too.

An education loan while taken will be with a moratorium so that it is easy on the pocket of the student. This loan enriches you as a person and helps you get a well-paid job or find a business solution for yourself, after getting trained professionally. The return on this is lifelong. You keep reaping the benefit of you educating yourself, till your last day. The interest you pay while taking this loan is negligible, of course.

Strangely enough, the bad loans are the ones which are more expensive too!

So, to avoid enslaving yourself from paying high monthly debts, please relieve yourself of the high-interest rate loans which are eating away your month’s pay and giving no returns other than being depreciated day by day.

One last thing, many people feel themselves under a ‘burden’ of home loan and tends to close that first. Do not make that mistake ever. If you have spare money, invest in retirement plans, SIP and other low-risk debt-funds to reap the benefit when you are old and retired. By foreclosing your home loan early with the liquid cash and hence not having any money left for investment anywhere, will leave you only with a house post-retirement with no money in hand. And, you can’t eat, enjoy and spend the house for next 20-25 years of your retired life. You need money for that.

Be wise. Live a life without any bad loans. No loans at all may not be financially a good choice for the modern generation, since you want to enjoy yourself when you are young. Ultimately, we live longer now than earlier with all the medial attention we get these days.

Happy Good Loaning! Happy Freedom from Bad Loans!!

Source: http://goo.gl/wKmt0d

ATM :: Relocating abroad and consequences of defaulting on education loan EMIs

Mehul completed his B. Tech in computer science from a leading institute in Pune and was hired by a renowned IT company through a campus interview.
By: Harshala Chandorkar | Published: April 23, 2016 1:58 PM | The Financial Express

ATM

Profile: Mehul Kumar (name changed), aged 25 years, a software programmer with a leading IT MNC

Scenario:
Mehul completed his B. Tech in computer science from a leading institute in Pune and was hired by a renowned IT company through a campus interview. At 23 years Mehul had the world at his feet with a high paying job and promising career path charted out for him. After working for two years at the company’s Mumbai office, Mehul was deputed to work on a project in the Chicago office in US. Getting paid in dollars when the rupee was seeing its worst fall, Mehul decided to make most of his finances.

He decided to purchase a plush bungalow in an elite locality in his home town in Pune. While on a vacation back home, he chose the property and made an advance token payment to the builder. He then applied for a home loan at an MNC bank and was confident of express approval considering his high paying international job.

However within a few days he was informed by the bank representative that his home loan application had been rejected owing to his credit history in CIBIL. Mehul immediately accessed his credit report online from CIBIL and found that his report showed defaults on an education loan he had availed for his B. Tech course. Before leaving for Chicago, Mehul had not bothered to ensure repayment on his education loan EMIs as he did not think that not closing dues would impact him in any way. And now his careless attitude had resulted in a bad credit record which hampered his chances of availing the home loan for his dream house.

Solution: What can Mehul do now?
The first thing that Mehul must do is to repay his education loan dues and avail a ‘No Dues’ certificate from the bank. He should then gradually start building his credit history by regularly paying his credit card bills and EMIs on any other loans he may have availed. He should also keep checking his credit report regularly to assess the health of his credit history. As his credit history and credit score improves and shows no defaults and delinquencies, he can apply for the home loan again and be confident of its approval.

Conclusion:
It is critical to understand that while moving abroad is a beautiful opportunity to develop both personally and professionally, one must never forget to payback and close the financial obligations in the home country. Before you go abroad for a longer period of time, it is good to decide what it is you want to do with your existing bank relations and financial liabilities.

One of the most important financial matters to sort at this time is credit card outstandings, loans and any debts that you may still owe. Here are a few tips to ensure that you have an immaculate credit history before you move abroad.

Pay and close all your credit card outstandings. If you decide on cancelling credit cards, ensure you receive a closing statement from the credit card company.

If you are running a home loan or any other loan, ensure that you make arrangements for regular EMI payments on this loan. Keep a track of the monthly EMI repayments and do inform your bank of your relocation and the new address.

It is equally critical to repay and close education loans, if you have availed any. Never think that it’s okay not to repay education loans. You credit report includes details of education loan as well.

Keep a track of your credit history by accessing your credit report and score regularly.

Protecting your credit history and score is critical even if you plan to leave the country and settle abroad. Remember that your credit history and score will affect almost every area of your life when conducting financial transactions. In some countries a prospective employee’s credit report is checked before recruitment. Therefore if you are moving abroad for work please ensure that you have a good credit history. You never know when you may be asked for your credit report!

Source: http://goo.gl/4Yux8A

NTH :: Banks learn a hard lesson worth Rs 5,192 crore on education loans

The figures speak for themselves. As on July 21, 2015, the total exposure of all banks to education loans was Rs 64,900 crore, according to RBI data. On an average, banks face an 8% default on this portfolio – that is Rs 5,192 crore.
Manju AB | Wednesday, 16 September 2015 – 7:25am IST | Place: Mumbai | Agency: dna | From the print edition

NTH

Sluggish job creation in the country is seeing students turning out to be the largest loan defaulters. Students from the southern states of Kerala and Tamil Nadu are the ones who are giving bankers sleepless nights, with the latter leading the defaulters list.

The figures speak for themselves. As on July 21, 2015, the total exposure of all banks to education loans was Rs 64,900 crore, according to RBI data. On an average, banks face an 8% default on this portfolio – that is Rs 5,192 crore.

Public sector banks are the worst-hit, as they are mandated by the government to give collateral-free loans. Private banks do not extend education loans. Bankers say moves are afoot to take collateral from the two southern states.

For the largest bank, State Bank of India (SBI), the default rate is 5%. The SBI’s default rate for its home loans is less than 1%. Even in the other portfolios of the bank, the default rate is about 3-4%.

For Bank of Baroda, the default rate on student loan is as high as 8.2% on a portfolio of Rs 2,100 crore. Its overall retail loan default is much lower, at 2.4%, and the home loan defaults is 1.64%. The same rates are replicated at most banks, with the Union Bank of India reporting a default rate of 6.5% and Canara Bank 8%. State Bank of Travancore, which is headquartered in Thiruvananthapuram, is affected the most, with a default rate of 12%.

A senior SBI official said: “Repayment is better in cases where borrowers are settled abroad as they generally get good employment and are able to repay their dues. Also, such loans are backed by collateral security. Students are very mobile. They move away from their place of study and it becomes very difficult to trace them. So, now we are insisting on PAN/ Aadhar details of the borrower/ co-borrower. In addition, we are ensuing that the names of defaulters do appear in the CIBIL database.”

All public sector banks are mandated to run the Student Loan Scheme, based on the Model Education Loan Scheme of Indian Banks’ Association (IBA). Under this model, loans up to Rs 4.5 lakh are extended without any collateral security, with just a co-borrower around. For loans above Rs 4.5 lakh and up to Rs 7.5 lakh, banks seek third-party guarantee. For loans above Rs 7.5 lakh, students need to submit collateral security. Delinquency is highest in the bracket up to Rs 4.5 lakh

“Tamil Nadu leads the default list, followed by Kerala, Andhra Pradesh and Odisha. These states have management courses and students are unable to secure jobs that will take care of their EMIs,” a senior Bank of Baroda official said. The bank has not kept any limit on its education loans.

According to a Union Bank of India official, “About 35% of the bank’s Rs 3,200 crore portfolio is lent to the southern states, where the maximum defaults occur. Loan requests are the highest from these states and we do not refuse education loans.”

Source: http://goo.gl/a47Pbi

NTH :: Education loan default can impact CIBIL score

Harshala Chandorkar | June 4, 2015 18:42 IST | The Hindu

NTH

According to CIBIL data, the outstanding education credit, including for study within the country and abroad, stood at Rs. 63,800 crore as on March 31 this year.

Non-repayment of education loan can now affect one’s credit score, a top official of Credit Information Bureau (India) Ltd (CIBIL) has said.

“The education loans have to be paid once one completes his/her course and gains employment. Also, like any other loans and credit cards, education loans are also reported to CIBIL and get reflected in the borrower’s CIBIL Report and impact the CIBIL Trans Union Score,” said CIBIL Senior Vice President Consumer Services and Communications, Harshala Chandorkar.

CIBIL Trans Union Score is a key parameter relied on by banks while processing loan applications.

According to CIBIL data, the outstanding education credit, including for study within the country and abroad, stood at Rs. 63,800 crore as on March 31 this year.

The data released by CIBIL throws significant light on education loan trends in the country.

While the demand for educational loan is need based, the number of new loan accounts opened in calendar year are almost same over the last five years, it said.

Noting that the third and fourth quarters of each calendar year witness a spurt in education loans, the data says about 1,30,000 education loan accounts were opened in the fourth quarter of 2014.

However, the average sanctioned amount continues to grow over time, it added.

Average sanctioned amount in fourth quarter of 2014 was Rs 6 lakh, while in fourth quarter of 2013 it was about 4.5 lakh. In recent period, loans with amount less than Rs 1 lakh has reduced below 10 per cent of total sanctions while loans with ticket size/amount of more than Rs 5 lakh have gone up to almost 30 per cent of the total sanctions.

In fourth quarter of 2014, loans of ticket size of more than Rs 5 lakh were around 30 per cent of total sanctions while in fourth quarter of 2012, loans of more than Rs 5 lakh comprised about 22 per cent of total sanctions,” CIBIL said.

It says delinquency on education loans has decreased over the past year.

“Delinquency for 90+ days amount overdue was around 3.50 per cent in fourth quarter of 2013 which has lowered to 2.70 per cent in fourth quarter of 2014,” says the data.

Stating that bad loans from education segment are very high, the Reserve Bank’s Deputy Governor R. Gandhi had asked CIBIL and banks to “counsel” the youth on good credit behaviour during the CIBIL Trans Union Annual Conference in March, CIBIL said in a release.

ATM :: How does a falling rupee affect you?

Priya Nair | May 18, 2015 Last Updated at 00:10 IST | Business Standard
Be prepared to pay more if travelling abroad or if your child is studying there. Other impacts can be varied

ATM

Your family and you are flying to the US next week on holiday. Flight tickets and hotel bookings were done in advance. So, why should the rupee depreciation bother you? It should because all other expenses, such as sightseeing, local transfers and food will increase as a result of the fall in the rupee.

Similarly, if your child is studying in a foreign university, don’t be surprised if tuition fees increase substantially over last year.

There are also some advantages of a falling rupee. Those working abroad will gain, as the same amount they remit will translate into more rupees.

“It looks like the rupee will be in the 64-65 range (to the dollar). As the rupee tends to be overvalued and exports are not growing much, the Reserve Bank might be willing to let the rupee depreciate,” says Madan Sabnavis, chief economist, CARE Ratings.

The immediate impact will be on foreign travel and students studying abroad. The indirect impact will be on other expenses, too, as oil prices will go up and this could push up prices of other commodities. However, this time, as the price of crude oil in the international market is low, there might not be much of an impact on domestic oil prices, says Sabnavis.

Below is a look at some ways a weaker rupee will impact your life and what you can do about it.

Foreign travel
Europe tours are popular with Indians in the summer months of April to June. Most people book in October for departures starting in April. Those who have booked and paid earlier, including the forex component, will not feel much of an impact. However, travellers who don’t pay the forex component in advance might feel the pinch. Usually, travellers pay the deposit and for flight tickets in rupees, in advance. The forex component, which covers accommodation, meals, sight-seeing and excursions, can be paid later. “For trips in April, packages are booked as early as October. We pushed many of our customers to pay in advance. Those who did not pay then might feel the pinch now,” says Daniel D’Souza, head of sales, Tour Operating, Kuoni India.

One way to avoid last-minute heartburn is to pay for your entire package in advance and not only the rupee component. If booking last-minute, choosing a short-haul holiday to a destination closer to home rather than a long-haul holiday is also a way to save some costs.

Tips to save

  • Reduce the number of days from 10 to, say, eight
  • Reduce the number of excursions
  • Switching to a lower category hotel or staying in a bed and breakfast or home stay
  • Cut on shopping rather than sight-seeing, since it is the experience that matters
  • Opting for public transport such as trains, subway or buses, rather than renting a car
  • While sightseeing, choose days when tourists are allowed to go for free or given discounts. Most monuments abroad have such days
  • While shopping, buying from flea markets can work out cheaper than from stores
  • Take a decent amount of cash with you, as you might not get good rates while travelling
  • Pre-paid travel cards that allow you to load multiple currencies are a good option. In these cards, the value of the rupee is of the date the money is loaded to the card

Foreign education
Students studying abroad also suffer when the rupee falls. The US, Britain, Canada, Singapore and Australia are popular countries for Indian students. The university will not offer any leeway in tuition fees. Students will have to pay the entire amount. In most cases, you will have to pay before a term starts.

Given the high tuition fees in foreign universities and the cost of living, most students take some loan and pay for the rest by scholarships or taking a part-time job. “When the rupee falls, it becomes difficult for the entire family, not only the student. And, not many individuals know how to hedge themselves against currency fluctuations by using derivative products. What you can do is try and pay the entire fee upfront when the exchange rate is low. Most universities give a discount of one or two per cent if you do so,” says Naveen Chopra, of The Chopras, a foreign educational consultancy.

Neeraj Saxena, chief executive, Avanse, a non-banking financial company that gives education loans, says there is an option to enhance the loan amount during the course. “We don’t usually disburse the full loan amount at one go. We do as per the semester. So, if the fees increase in the third semester, we can increase the loan amount,” he advises.

Saxena suggest students going abroad should look for scholarships or part-time jobs like teaching assistantships. “We find of the Rs 30-35 lakh required for a foreign university course, students often are able to earn Rs 8-10 lakh through part-time jobs, which pay by the hour,” he says.

Tips to save:

  • Using discount coupons given by universities and accepted at all major stores
  • Using cards like the ISIC (a specialised card for students) for travelling, eating out, even shopping at some departmental stores
  • Going for free concerts, to movie halls which offer student discounts
  • Going to budget pubs, during happy hours, for leisure
  • Use special cards that offer discounts to students for eating out and shopping

Medical costs
The rupee’s weakness will push up medical costs, too. About 30-40 per cent of a hospital’s cost is on account of medical equipment and of these, 80 per cent is imported, says Vivek Desai, managing director, HOSMAC, a health care management consultancy. “Many common procedures in cardiology and cancer care use imported equipment. Even orthopaedic implants and consumables used in laboratories are imported. Any increase in their costs will be passed on to patients and there is nothing the latter can do about it. That is why medical insurance is a must. That, too, comes with a ceiling,” he says.

Other costs like air-conditioning and flooring in hospitals, also imported, will also see an increase and hospitals are likely to pass these on to patients by way of higher charges.

Patients going abroad for treatment will also see an increase in cost due to the rupee’s fall.

Tips to save:

  • Health insurance is one way you can deal with rising medical costs. Buy one early in life
  • Even if covered under your employer’s group medical insurance, take a separate family floater
  • Buy a top-up medical insurance to increase your sum assured without too much increase in premium

A weak rupee will benefit
Remittances
Non-resident Indians (NRIs) sending money home will benefit from the rupee’s weakness, as they will get more returns for what they send. Typically, NRIs with higher disposable incomes send more money to India when the rupee falls, says Sudesh Giriyan, chief operating officer, Xpress Money. “We will see an increase in remittances when the rupee crosses 64 to a dollar. In the case of cash remittances, we don’t see much increase because these are smaller ticket-size. But in direct remittances, which are bigger ticket-size, currency value has a bigger impact,”

Many NRIs also take loans from banks abroad, since the interest rates are lower, and remit money to India in order to invest, he adds.

There is usually an increase of seven to 10 per cent in remittances on account of rupee weakness, says K A Babu, head-retail and NRI banking, Federal Bank. Remittances from the Gulf countries tend to increase in such times than those from elsewhere.

With regard to investments, those from the lower income group prefer bank fixed deposits – NRE rupee deposits or FCNR deposits which are in foreign currency. The NRE deposits offer the same rates as domestic FDs and can be liquidated easily. The FCNR deposits will provide protection from exchange rate volatility, though the rates are lower.

“Ideally, investors should have a mix of both kinds of deposits. That way, they can earn high interest rates and also get a hedge from currency fluctuation,” Babu says.

For NRIs in the high income segment, banks and wealth management firms offer portfolio management services, through which they can invest in stocks, PMS schemes, mutual funds, fixed income products, real estate, etc. The preference is usually for land or residential property. Some NRIs might also look to expand their business in India and buy commercial property.

International funds
International equity funds that invest abroad will benefit from the fall in the rupee. Investors of such funds would have seen their portfolios rise in the past few months. According to data from Value Research, over the past three-month period, returns from international funds have been the highest at 6.19 per cent, while equity multi-cap funds have seen their returns fall 3.19 per cent.

But these gains are marginal and should not be the only reason for investing in international equity funds. For instance, over a one-year period, multi-cap funds have given returns of 34.84 per cent, while in the case of international funds, it is 7.78 per cent.

The US market is currently doing well and will definitely give better returns in the near term, as it will not be as volatile as the Indian equity market. But over a longer term, that is a five-year period, Indian equities will definitely give better returns. So, one can look at international funds provided they have sufficient exposure to Indian equities, say experts.

Anand Radhakrishnan, chief investment officer at Franklin Equity, Franklin Templeton Investments – India, also says investors should not look to time the markets, but invest on a regular basis and in a systematic manner. “Typically, the exposure would depend on the individual’s risk profile and investment objective, but as a thumb rule, one should have at least 20 per cent of their investment portfolio allocated to international assets. Equity investments warrant a longer investment horizon and we recommend investors come in with a three-to-five year horizon or more,” he says.

Source : http://goo.gl/SUyRgr

ATM :: Education loan or top-up loan: A toss-up

ADHIL SHETTY CEO, BankBazaar.com | May 15, 2015, 12.43 PM IST | Source: Moneycontrol.com
Education loans do offer tax benefits and easy repayment norms, however they come with some limitations where a top-up loan scores.

ATM

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.

Source : http://goo.gl/aNQAyO

ATM :: Don’t miss retirement goals for children’s higher education

It could mean having to prolong work life and putting money in risky investment options
Arvind Rao | April 25, 2015 Last Updated at 21:25 IST | Business Standard

ATM

It’s a dilemma several middle-aged parents grapple with. Two goals – retirement and saving for children’s higher education – but not enough funds to meet them. Parents would be tempted to compromise on the former to meet the latter. But with medical costs rising exponentially, this can’t be looked at as a viable solution. This could also mean extending their work life or taking greater investment risks closer to retirement.

The dilemma

Here’s a case study that shows how one can strike the right balance. Ajay and Varsha Sharma, aged 50 and 48 respectively, earn Rs 40 lakh annually, which is not enough to fund all of their major goals. They have to repay their existing home loan of about Rs 40 lakh in the next five years. The couple needs Rs 4.5 crore for retirement and Rs 70 lakh in the next 10 years to fund the higher education of their two children.

The family savings work out to about Rs 15 lakh a year. Their employment-linked retirement benefits and 1 BHK property investment is expected to fetch Rs 2.12 crore, or 45 per cent, of their retirement corpus. This leaves them with a gap of Rs 2.48 crore, or about 55 per cent of the total corpus.

To fund the gap, the Sharma’s can invest Rs 10 lakh per annum in a mix of diversified and mid-cap equity funds. Assuming annualised returns of 12 per cent, they should be able to garner Rs 2.48 crore over the next 12 years.

At the current EMI of Rs 54,000, their home loan outstanding at about Rs 40 lakh is projected to close at the end of 10 years. They aspire to accelerate the repayment and close the loan in four years. For this, they will have to accumulate at least Rs 6.50 lakh annually via monthly contributions in recurring deposits. At the end of every year, the accumulated amount should be used to prepay the loan.

The amount of Rs 70 lakh for higher education can be mopped up by investing about Rs 4.5 lakh per annum over the next 10 years in equity-oriented balanced funds, assuming annualised returns of 10 per cent.

With the current family savings, they are looking at a deficit of about Rs 6 lakh per annum, at least for the first five years.

Part-funding children’s education

The couple has decided to make a provision for up to 50 per cent of their children’s higher education budget by extending the period for their accelerated home loan. They can cut the savings rate for the repayment by 50 per cent to Rs 3.25 lakh a year, thereby extending the period for their home loan repayment to about six years. This way, their contribution for the education also comes down to about Rs 2 lakh and savings for all three goals fit within the family savings. The additional family savings at the end of the home loan period could be used to boost retirement savings or for their children’ marriages.

To accumulate the remaining 50 per cent of their education corpus, Sharma’s children can fall back on scholarships. They can also meet the expenses through education loan or loan against fixed deposits:

Education loan: Interest rates on these are 11-12.5 per cent, with tax benefits available under section 80E. A good retirement corpus, in the form of investments, will enable one of the parents to stand as guarantor/co-applicant for the loan. For loans above Rs 4 lakh, margin money, ranging between 15-20 per cent of the loan, may be required, which can be funded by the parents.

Loan against fixed deposits: Let’s assume the Sharma’s garner a corpus of about Rs 2.5 crore at the time of retirement, which they don’t fully need immediately. They could invest, say, Rs 25 lakh in a bank FD giving 8 per cent per annum and take an overdraft against the same for their children’s education. The rate of interest charged in case of overdraft will be 1-2 per cent higher than the FD interest rate. Even assuming a 10 per cent rate of interest, this option works out to be cheaper than an education loan, but the interest paid will be sans tax benefits under section 80E.

The parents can make the children responsible for repaying the overdraft with their earnings. This will enable them to get their fixed deposit back along with the accumulated interest, which can then be utilised for their retirement. The Sharma’s should avoid loans against property as the EMI would be calculated only for their balance working years, which could mean a bigger outgo per month, plus no tax benefits on the interest paid thereon.

Funding education completely

In case the Sharma’s decide to fund 100 per cent of their children’s education and continue with the six-year home-loan closure plan, they would need to set aside Rs 7.5 lakh per annum and work for two more years to fund their retirement corpus. The Sharma’s may have to invest more aggressively, allocating as much as 75 per cent of their savings in a mix of equity mid- and small-cap and sectoral funds, and the remaining 25 per cent in balanced funds to achieve an 18 per cent growth rate and retire within the next 12 years. This strategy, however, may expose the Sharma’s to a bigger risk of not achieving their target corpus within the available time frame if the equity market do not deliver good results. Considering these risks, it is definitely better for them to part-fund their children’s education needs and not compromise on their retirement goals.
The writer is a chartered accountant

Source : http://goo.gl/lNXl7d