“Should I let my son go for an MBA overseas?”

This innocuous little question on Apnapaisa “Ask the expert” section caught my attention.

Why this question?

Which father would not want to let his son do an MBA overseas? I questioned myself.

To look answers for our ( His & Mine) questions, I decided to dig a little further to find out what was the dilemma about.

Let me share the dilemma and the solution here:

The reader Dinesh Sehgal (name changed) was in his early 50s and was working as a mid-level officer in a Public Sector Undertaking (PSU) in Delhi. He had married off his two daughters and his only son was an engineer and working with a Delhi based Software Company. The expenses incurred on bringing up his children and their education and marriage and his own modest income (Rs. 7 lacs per annum net of taxes) meant that he had no significant investments/savings. He had his own house (worth around Rs. 55 lacs) though with a home loan of Rs. 18 lacs still outstanding on it. His son wanted to do an MBA in Australia, which would cost him around Rs. 20 lacs. His son had savings of around Rs. 5 lacs and was looking for an education loan of around Rs. 15 lacs. A PSU bank had also agreed to provide this loan but required Dinesh to be a guarantor as well as to provide the house as a collateral security for the education loan. The PSU bank was prepared to take over the existing home loan as well from the existing lender.

If it was all set, then what was the problem?

Clearly Dinesh was having second thoughts. His only serious asset was the house and he was worried about loosing his house in case the son was not able to repay the loan for any reason. An unstated concern was perhaps whether his son would be responsible enough to pay of the education loan or leave him holding the can after completing the course and starting of his career. At the same time he badly wanted his son to get the additional qualifications so that he could progress in his career.

A real dilemma, this!

Even this left me perplexed, like what to advice him? As a fellow Indian I understood Dinesh’s desire to do the best for his son. At the same time as a Financial Planning professional it was clearly not advisable to expose your only financial asset to the risk in such a manner.

I must confess, I was a bit confused. After lot of discussions with our financial planning team (all of whom are much younger – with only one of them having a child aged 7 years - and hence not really in a position to empathise with Dinesh’s dilemma) I gave worked out a typical Indian style compromise solution.

My first question to Dinesh – Are you prepared to borrow money against the security of your house to lend to your son for the purpose of his higher education?

His reply was, “ If I could be reasonably sure that my son would pay it back.”

My next question - Under what circumstances did you expect your son not to repay the loan?

He mentioned the following reasons:

1) He will fail in the course – given his brilliant academic track record so far this was unlikely

2) He will fall sick or have an accident preventing him from completing the course – this is an insurable risk and should be covered by Insurance

3) He will complete the course but not be able to get a job – given his background this position at worst can only be temporary

4) He will get a job but due to other responsibilities (marriage, job overseas, etc…) neglect to repay this liability.

The last point was the real concern area. Normally, I told Dinesh, you depend on our culture and traditions to make sure that the son will pay for the father’s debts. (read the story in DNA dated November 21).

Analysing his state of mind, I advised that in your case the debt was really taken by your son himself and only guaranteed by you. A good compromise option would be to draw up a legal document between you and your son making it clear that whilst both are joint borrowers on the bank’s records, the loan has been taken for the purpose of the son and as between themselves he is fully liable to repay the loan. This document along with the normal social pressure that exists in our society should be a reasonable safeguard against the son neglecting to pay back the education loan even though being capable of paying of.

Dinesh has not got back to me on this and I am not aware whether he actually followed my advice. Could there have been a better advice in such a situation?

I invite the views of all you readers on Dinesh’s dilemma.

A momentous moment in India’s retail lending history has just been ushered in very quietly. A few days ago Credit Information Bureau of India Limited (CIBIL), which is currently the only fully operational credit bureau in India, quietly introduced a manual system to provide consumers with their own credit history on a test basis. In a written communication from CIBIL to Apnapaisa it has been clarified by CIBIL that “CIBIL has started offering Consumer disclosures through an interim solution. This interim solution is a testing phase and we will be able to operationalize the full-fledged Consumer Relations System basis our learning from this phase. In this interim phase CIBIL will be manually handling consumer requests for a copy of their credit information report.  CIBIL is also developing the infrastructure, systems and processes for an automated solution that would be needed to enable an individual direct access to their Credit Reports from CIBIL on-line.  The full-fledged Consumer Relations System will have world-class features that will allow consumers to access their report on-line and banks to respond to errors via an on-line maintenance tool. The automated phase is expected to be ready by the beginning of next fiscal year “.

So why is this such an important event that I am calling it a momentous occasion for the Indian retail lending history. For those of you who have just tuned in, CIBIL is one among 4 credit bureaus that have been licensed by the RBI under the Credit Information Companies Regulations Act, 2005 (CICRA). CIBIL though is the only one that already been operational for around a decade now and has the credit repayment history of around 13.7 crore loans or credit cards.

Almost all of the major lenders provide details of the credit facilities given by them to their customers as well as the amounts that have fallen due and the repayment made by the customers on a periodical basis (monthly or quarterly). CIBIL collates and aggregates this information. Thus when a customer (say Mr. Desai) approaches any bank (say Bank of Bharat) for a credit facility CIBIL is in a position to go through its own records and provide details of the existing credit facilities enjoyed by Mr. Desai to Bank of Bharat as well as his repayment history on such facilities. This enables Bank of Bharat to take a more informed decision on Mr. Desai’s credit application since it now has access to credible third party information on Mr. Desai’s existing obligations as well as his repayment history. It also benefits Mr. Desai if he has maintained a spotless repayment history since he is able to get the credit facility quickly and cheaper based on such good record. If his earlier repayment history is not so good, off course, he will find it difficult (and more expensive) to get the credit facility.

Up to now Mr. Desai could not access his own credit report. There was a rather convoluted way for Mr. Desai to get a copy of his own credit report but with this step he can get a copy of his own report by paying Rs. 142/- to CIBIL. This will help him in finding out if there are any errors in the report. A large number of consumers today feel helpless about erroneous repayment history being reported by the banks to CIBIL showing the consumer in default even where the so called “outstanding payment” is in dispute. These kinds of errors are the highest in the case of credit cards.

Since now he can have access to his own report the consumer can point out any errors in the report to CIBIL who are, under the CICR Act, required to notify the concerned bank. The erroneous entry will have to be deleted by CIBIL unless the concerned bank reverts to CIBIL within 30 days of the consumer filing his error report with CIBIL. If the consumer is not satisfied with the action of the bank in this regard he can always file a grievance before the banking ombudsman. Thus by having access to their own credit report the good consumers can ensure that they do not fall victim to erroneous reporting by the banks. At the same time consumers who delay payment for any reason will have to pay the price for such delays. Good consumers who pay their instalments will stop subsidising the consumers who delay payments. At a future point of time CIBIL may even share their proprietary credit score with the consumers for an additional fee. This score predicts customer’s likelihood of becoming a defaulter in more than 91 days within the next year. Higher the score less are the chances that the consumer will default. Any score above 700 is considered good. Having access to this score will assist the consumer in getting a rough idea of how banks view his credit standing and he can then take action either improve his credit score or if his score is already very good take care to maintain it at a high level.

So if you want to get a copy of your own credit report download the form available on the apnapaisa website at this link and fill it in and along with the required documents (mentioned in the form) and the payment of Rs. 142/- send it off to CIBIL address mentioned in the form.

This historic step needs to be welcomed with all fervour by consumers who will now no longer be helpless in knowing what banks are reporting about them to CIBIL.

I have already sent in my application to get a copy of my credit report.  I have taken great personal care to keep my credit standing immaculate but am awaiting with bated breath what my credit standing looks like as reported by the banks.

Watch this space for my comments on my own credit report.

It’s that time of the year again when wishes are horses (well almost). Imagination (and hope) runs high . Well here is my wishlist for Mr. Mukherjee.

http://www.apnaloan.com/prebudget-wishlist.html

As a potential education loan applicant, this story could be a ray of hope for you. As loan applicants we all may know so many reasons of why we could be denied any loan, for any purpose, whatsoever. But do you know that a public-sector bank (specifically) can’t deny you a study loan. According to a newspaper article I read the other day, a student can call the Finance Minister or the officials of the department.

If your bank says that you can’t get a loan because of the place of your residence or your age, call the Ministry. They can’t insist on the institute being within the limits of the branch.

Same is the case if the bank tells you that your loan guarantor’s residence has to be the same as yours.

All this is good news for you if you want to pursue higher studies, even if you are, say, 45 years old (not an age when typically one takes up an educational endeavor). This is true for study in any institute in India. There just one pre-condition. If your institute is not approved by a statutory body such as UGC, AICTE, the central government or a state government, you will not be so lucky.

Loans are generally assumed to be a risky liability as the generally individuals avail loans more than what they can bear. A loan, by itself, is never risky; it is only by the improper utilization and improper budgeting, the problem starts. An individual perhaps forgets that the way he wishes to earn interest on his investments, he also has to pay interest on his liabilities.

Loans availed can be judiciously used also to save taxes in an efficient manner. Some of the tools are:

Interest portion of home loan
The first and the foremost tax sop is the interest amount that you pay on housing loans. The interest on housing loans in the initial years is the major component of the EMI you pay. The interest may exceed the rental income from house property, resulting in loss from house property.

The interest payable (accrued and not paid) of a home loan is eligible for deduction under section 24(b) of the income tax act as “interest on borrowed capital”. The interest deduction is Rs 1,50,000 (if the loan/property acquired after 01.04.1999) for a self occupied property. For let out property/deemed let out property, the actual accrued interest is deductible without any limits.

Principal portion of home loan
The principal portion of a home loan is eligible for deduction under section 80C of the income tax act. The criteria being, the assesee has to obtain a loan from an eligible financial institution/bank and the proceeds has to be used for the construction/purchase of a house property, which is subject to income from house properties. The maximum amount of deduction is Rs 1,00,000 under section 80C. But the deduction will be taxable in case the property is sold within 5 years from the date of construction/purchase.

• The house property shall be registered in the name of the person, who intends to claim deduction towards interest and installment.
• In the case of working couples having substantial taxable incomes, it may be worthwhile to register the housing property in the joint names and take separate housing loans to claim deduction of interest and installments.
• The EMIs may be planned in such a way that the payments towards principal part of the loan do not exceed the limits available u/s 80C.

Interest portion of education loans
Section 80E of the income tax act provides for deduction in respect of repayment of the loan taken for higher studies. For the deduction, the individual should take a loan from a financial institution or any approved charitable institution. Secondly, the loan should be taken for higher education and for the assessee himself. However, higher education means full time course for graduate or post-graduate courses in select fields. The amount eligible for deduction is the entire interest amount. The deduction is available for eight assessment years starting from the assessment year in which the assessee starts paying the interest on loan, or until the interest is repaid in full, whichever is earlier.

While individuals lose sleep over paying the EMI’s after availing a loan, seldom they know that the loan can be used as an effective tool to reduce tax.

Considering a hypothetical example,

Total principal paid during the year – Rs 3,00,000
Total interest paid during the year – Rs 1,70,000
Interest on education loan – Rs 30,000

The total maximum deduction available will be Rs 2,80,000. Assuming the assessee is taxed at the maximum marginal rate i.e. 33.99%, a tax outflow of Rs 95,170 is saved.

Thus, loans can do more good than bas if utilized judiciously. Living without loans is tough, so utilize it effectively while you can!

The author is a Certified Financial Planner, working as Senior Manager with Mumbai-based SRE Financial Planners.

College fees - two words that can strike terror in the heart of any parent. Today students do not have the means (parental or otherwise) to fund either tuition fees, course materials, or general living expenses, and find themselves having to apply for education loans. The loan includes not only tuition or college fees but also other incidental expenses for pursuing such studies like hostel charges, transport charges etc.

Education loans are available with two interest rate options: fixed and floating. Most banks offer only the floating rate option. In this case, when interest rates move higher you end up paying a higher amount of EMI, or else, the tenure of your loan gets extended. The education loan providers generally require a guarantor who can take the responsibility to repay the loan, in case the student fails to repay the whole loan amount.

Education loan repayment is deductible under Section 80E of the Income Tax Act. The deduction will apply only on loans taken for higher education. The educational loan should be for either an individual’s or his/her relative’s higher studies. Higher education here means full-time studies for any graduate or post-graduate course in medicine, engineering, or management, or post-graduate courses in applied sciences or pure sciences, including mathematics and statistics.

Now for some repayment tips:

Make loan repayments from income chargeable to income tax. If repayments are made from income exempted from income tax, it will not qualify for deduction. And remember, the amount eligible for deduction is interest component of the loan repayment. This deduction is available for a maximum period of eight assessment years beginning in the year in which the interest is first paid.

The main thing when considering applying for education loans is to make sure that you get the best deal possible for your particular needs. It is worth spending some time researching. It may also be worth seeking the advice of a professional in the field. A little time spent in this way can save you a great deal of money in the long run. Education loans options may seem viable but one should not lose sight of the fact that there is a real danger of falling into a debt trap because you end up committing your future earnings towards your loan repayment, thus increasing expenses every month.

The author is a Certified Financial Planner and is Vice-President, Personal Finance at Apnaloan.com Services (P) Limited.