Pursuing higher education in college or a university is a big step for any student and often a financial burden for that student’s family. It is typical for parents to be co-applicants when children apply for education loans, which allows the children to receive better terms and larger loan amounts. Whatever the role of a co-applicant is, especially on an education loan, it does have responsibilities and risks for parents.
If you are a parent considering being a co-applicant on your child’s education loan, it is essential to understand what you are legally and financially agreeing to. What liability are you taking on? What can you do to protect your financial future? How can you help your child without risking your credit?
This full-fledged guide is meant to take you through everything you need to know about co-apply for education loans covering eligibility criteria, risks, repayment responsibilities, tax advantages, and practical tips on how to lessen your risk/ exposure. Whether this is your first time or you want to be smarter about your decisions this time, this blog will equip you with the knowledge you need to co-apply safely and with confidence.
Helping your child achieve their educational dreams is priceless. Let’s make sure your support is safe and financially sound too.
Why Parents Should Consider Co-Applying for Education Loans?
In regards to financing a higher education, education loans can be the difference between dreams and costs for many students. However, most young students, especially those starting from scratch, do not have the credit history or established credit worthiness to meet lenders requirements for larger loans on their own. This is where parents can help, by signing the education loan as co-applicant.
Importance of Parental Support in Education Financing
Parental support is often the backbone of securing education loans, especially in India where banks and financial institutions consider the applicant’s repayment capacity and credit profile as a key factor for loan approval. By co-applying, parents bring in their steady income, good credit score, and financial credibility, which significantly improves the chances of the loan being sanctioned.
Instead of simply improving the chances of formally becoming an approved borrower as a co-signer, co-application with a parent will often assist in obtaining larger amounts of loans at more favorable interest rates. This is important since educational related costs involve fees such as tuition, accommodation, travel, course-related materials and other living expenses.
In addition to the financial benefits of co-application, parental involvement helps with providing lending institutions peace of mind regarding payment. This pro-acts the paperwork portion of the request as they feel more assured in approving your loan with a parent on the application form. It’s a symbol of conscientious mutual commitment, as a student, of planning for higher education while also being responsible in the handling of your finances.
Benefits and Responsibilities of Being a Co-Applicant
Benefits for Parents:
- Better Probability of Loan Approval: If parents are co-applicants, it is very likely that loans would be approved as lenders prefer parents as co-applicants because they have stronger finances.
- Higher Amounts of Loan: The applicant is assured of a greater loan amount as they are using the income and credit rating of parents as collateral to secure additional funds for other relative educational expenses.
- Rates of Interest: Co-applicants with a good credit rating often work better at negotiating different rates of interest with the lenders.
- Tax Benefits: As the co-applicant parents will also get tax benefits under section 80E on the interest that is paid on the education loan amount.
Responsibilities for Parents:
- The co-applicants are jointly liable for repayment which simply means if the student defaults on his EMIs then the creditor has the right to pursue the co-applicant to recover his amount of loan.
- This means that any lapse in repayments to whichever extent in regards to future defaults or delays until the full amount is paid will carry the credit score implications and capacity for borrowing for the co-applicant.
- Therefore, parents should also consider their own financial position before entering into that commitment, to avoid any potential subsequent friction.
Understanding the Risks Involved in Co-Application
While being a co-applicant with your child on an education loan can be an act of good support, there are risks and obligations that every parent needs to understand before co-applying for an education loan, and an awareness of potential issues can help parents better prepare financially and avoid issues later.
Financial Liabilities and Repayment Responsibilities
When parents are co-applicants with the student, both are equally accountable for repayment of the education loan. This means that both the student as the primary borrower and the parent as the co-applicant are financially and legally responsible for timely repayment of EMIs.
If the student is unable to pay EMIs for whatever reason – job loss, health issues, or other financial constraints – the bank can seek repayment from the co-applicant. They may have also seen the co-applicant’s income and assets as a possibility for outstanding amounts the borrower does not pay. Overall, co-applying is more than an action step; it is a promise of repayment.
Before signing with the child (student) parents must evaluate capacity of their own repayment and initial willingness to take over repayments if it is not repaid, in order to avoid penalties, interest, and litigation.
Impact on Credit Score and Loan Eligibility for Parents
Co-applying affects the parent’s credit profile. The education loan will show as a liability on the credit report of the co-applicant, and with any delay or default in repayment the co-applicant’s credit will be adversely impacted if the parent does not make loan repayments on time. A low credit score can further limit a parent’s ability to secure loans or credit facilities in the future.
Furthermore, the outstanding loan amount will be considered in the co-applicant’s debt-to-income ratio which is evaluated by banks when considering applications for new loans. When banks consider loan obligations that are higher, parents may be limited in applying for other financial vehicles including home loans, personal loans, or credit cards.
Thus, parents should consider their overall financial position and loan plans before co-applying.
What Happens if the Primary Borrower Defaults?
If the main borrower fails to make loan payments, the bank will hold the co-borrower in the same position. The bank may issue reminders and use various recovery options and then potentially legal action against both borrowers.
If the loan is not paid, it could be classified as a Non-Performing Asset (NPA), this will impact both parties with credit issues and increase cost because of penalties and more interest.
Parents should be aware of when the repayments are made. They should check in with their children and have a discussion together about the loan repayment schedule to limit the chances of defaulting.
Tax Benefits for Parents as Co-Applicants Under Section 80E
By co-applying for their child’s education loan, parents provide their essential financial support and potentially receive considerable tax benefits. One of the main benefits is a deduction under Section 80E of the Income Tax Act which helps to lessen the loan repayment burden! A parent can claim this deduction if they are the co-applicant (along with the student) and if they are the one making the interest payments. If any of the following circumstances exist, the tax deduction under Section 80E can be extremely useful:
- The student is still studying or not earning quite yet.
- The parent is still making the EMI repayments from their own income.
- The bank is providing the parent with interest certificates.
How Parents Can Co-Apply on Education Loan Portals
Being a co-applicant with your child’s education loan is a smart and responsible way to streamline the loan application and enhance the chances of approval. The emergence of digital platforms like Vidya Lakshmi, bank and NBFC portals have streamlined co-applying together process. Here’s how parents can co-apply on different education loan portals step by step.
1. Knowing the Role of a Co-Applicant
- Before you proceed, let’s know what being a co-applicant means:
- As a co-applicant you are equally responsible for the repayment of the loan.
- Most banks require a parent or guardian to be the co-applicant.
- You may have a need to submit KYC proof, income documents and tax returns.
2. Co-Apply using Vidya Lakshmi Portal
The Vidya Lakshmi Portal (www.vidyalakshmi.co.in) is a government-backed, single-window facility that allows you to apply for a loan from multiple banks simultaneously. Steps to Co-Apply:
- Student Registration: The student must first register and fill out the Common Education Loan Application Form (CELAF).
- Enter Co-Applicant Details: During the application, there’s a specific section to input the co-applicant’s details (usually parent/guardian): Name, relationship, address, PAN and Aadhaar numbers, Income details (ITR/Form 16) & Employer information, if salaried
- Document Upload: There may be banks that allow you to upload other documents, such as proof of income for the co-applicant, and ID documents, ensure those are uploaded if it is specifically allowed in the steps above.
- Selecting Banks and Submitting: After submission, the application is given to chosen banks, and you will receive notifications claiming they may ask you to provide the documents via offline or online channels.
3. Co-Application via Bank-Specific Portals
There are many banks, like SBI, HDFC Credila, Axis Bank, and Bank of Baroda providing loans application for this. Typical Process:
- Visit the bank’s education loan portal.
- Fill in student details and select “Add Co-Applicant.”
- Input parent/guardian information including financials.
- Upload KYC, income tax returns, salary slips (or proof of business income).
- Submit the application. Some banks initiate instant preliminary approval.
4. Using NBFC or Private Lender Portals
NBFCs such as HDFC Credila, Avanse or InCred tend to have more flexible co-applicant (parent) policies. How it works:
- You go to lender’s website and apply for an education loan
- Enter student’s basic details and program details
- Under Financial Guarantor Details, add a co-applicant parent
- Submit income documents (Salaried: IT returns, salary slips; Self-employed: IT return, proof of business)5. Many NBFCs will either collect documents from your house, or allow you to upload them
5. Documentation needed from parent co-applicants
- KYC/ ID docs: PAN, Aadhaar, passport-sized photograph
- Proof of Income: If Salaried: salary slips for last 3 months, Form 16, bank statement & if Self Employed: IT return for 2 years + registration/license proof of business
- Proof of Address: utility bills, Aadhaar, passport
- Proof of relationship: parent relationship will be mentioned in application form (normally not a separate document if required)
FAQs: How to Co-Apply for Your Child’s Education Loan Without Risk
Q. Is it necessary for a parent to be co-applicant in an education loan?
A. In most cases, most of the Banks/NBFC’s insist on co-applicants, so a parent/guardian would have to be a co-applicant for students with no independent income. In addition, it minimizes the lender’s risk in its entirety; consequently, there are more chances of getting the loan approved.
Q. What does co-applicant liability mean for a parent?
A. As a co-applicant, the parent shares equal legal responsibility for making loan payments. In the event the student doesn’t make loan payments, the lender has the ability to recover dues from the parent.
Q. What are the documents required as a co-applicant?
A. In general, you would be required to submit the Proof of identity ( PAN, Aadhaar), Proof of address, Proof of income (PWD, ITR, Form 16, or proof of business income) & bank statement (usually for the last 6 months)
Q. Will a credit score check be done for the co-applicant?
A. Banks and NBFC’s access the credit history/score of the co-applicant when gauging creditworthiness. A solid credit score (700 range and above) makes a significant difference in successful approvals.
Q. Can both parents be co-applicants?
A. In most cases, only one parent is added as the co-applicant. However, if income support from both parents is required to meet eligibility standards, some lenders allow both parents to co – apply.
Q. Can I be a co-applicant if I’m retired or self-employed?
A. Self-employed individuals, retired, or individuals on pensions can co-apply, but the bank may require extra documents or additional second co-applicant income to be stable.
Q. Do co-applicants get any tax benefits?
A. Under Section 80E of Income Tax Act, if a co-applicant (say, parent) is paying the education loan repayments of the student than the co-applicant can claim a deduction on interest paid on the education loan.
Q. What happens if the student fails to repay the loan?
A. If the student defaults, the bank can recover dues from the co-applicant. Defaults also negatively impact both the student’s and parent’s credit scores.