Everything You Need to Know about an Education Loan

What is an Education Loan?

• An education loan covers all the study-related expenses incurred during the course duration. For example, it generally includes admission fees, tuition fees, hostel fees, library fees, cost of books, a laptop, and travel tickets (if you are studying abroad), etc.

• A student can apply for an education loan to a bank/financial institution along with a parent, guardian or guarantor. A student is considered as the main applicant and parent as the co-applicant.

• A student has to repay the loan after completion of the course. Typically, the banks/financial institutions give the students six months time after completing the course to start paying the EMIs. This exempted time to pay the EMIs is called a moratorium period.

• A student or a parent/guardian has to pay a simple interest charged by banks/financial institutions during the study/course period. And, after the relaxation period of 6 to 12 months, a student is liable to repay the loan.

What is the cost involved in an Education Loan?

• Different banks/financial institutions charge a different rate of interest on education loans, which can be anywhere from 6% to 18% p.a.

• Banks/financial institutions can offer a fixed or a floating rate of interest. One needs to be very careful while applying for the loan, as the type of interest can make a considerable difference in their EMI.

• Moreover, the interest rate can vary depending on the loan amount and whether it is for domestic education or education abroad.

• The other charges, such as processing fees, pre-payment charges and charges on delayed payment of EMIs, should also be considered while applying for an educational loan. The processing fee is generally 1% to 3% of the total loan amount.

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What is the eligibility criteria for an Education Loan?

• Nationality: Indian citizen, Non-Indian Resident (NRI), Overseas Citizen of India (OCI), Person of Indian Origin (PIO), and student born to Indian parent abroad and wants to study in India, are eligible to apply for an education loan in Indian banks/financial institutions.

• Courses: Job-oriented courses - in India or abroad, approved by banks/financial institutions, such as graduation, post-graduation, diploma courses, professional courses, vocational courses, doctorate, or certification courses of minimum six months duration, etc., are eligible for an educational loan. Apart from regular/full-time courses, one can also avail an educational loan for part-time courses. Usually, the banks/financial institutions have a specified list of courses that are considered for loan approval.

• Institutes: Government Universities and Colleges (e.g. Mumbai University), Reputed Private Institutes or Government aided Institutes (e.g. IIM and IIT), International Institutions (depends on the bank/financial institutions approved list), and Professional Institutions (e.g. CFA), etc. An applicant must check with the lender the list of institutes they approve for providing educational loans.

Is any security required for an Education Loan?

• For loans up to Rs 4 Lakhs, banks/financial institutions do not insist on a guarantor.

• Margin money is a percentage of the required loan amount that an applicant has to pay on his/her behalf.

• Currently, the required margin money for study in India is 5%, whereas, for study abroad, it increases to 15%.

• Collateral is an asset you can pledge to the bank/financial institution as security for availing loan. It can be residential or commercial property, fixed deposits, acceptable insurance policy, etc.

• For loan amounts less than Rs 7.5 Lakhs, banks/financial institutions generally do not ask for collateral.

• However, if a loan amount is high or the institute/course is not listed in the bank/financial institution's list of pre-approved institutes/courses, they can ask for collateral. But, it does not mean that bank's approved list of institutes or courses does not require collateral.

• For loan amounts more than Rs 40 Lakhs, all the banks/financial institutions insist on collateral.

What are the Tax Benefits?

If you are a legal guardian who is paying interest on repayment, you can avail a tax benefit for the interest paid under Section 80E of the IT Act, for a maximum of 8 years. However, the principal amount of the loan does not give you any benefit on tax.

What are the documents required to apply for an Education Loan?

• Admission Letter from the educational institute

• Previous educational documents, such as mark sheets, passing certificates, etc.

• Any government-approved identity proof

• Any government-approved age proof

• Any government-approved address proof

• Any government-approved signature proof

• Appropriate Student Visa

• Latest passport size photographs

• Bank statement copy of last six months

• Income proofs of co-applicant, such as latest bank statement, salary slips, ITR, balance sheets, etc.

• Property or asset related documents in case of collateral

What is the application process for an Education Loan?

1. Walk-in: You can walk into the branch of your preferred bank/financial institution and enquire about an education loan to the Customer Service Officer. He/she will provide you with all the required information or introduce you to the Loans Manager.

2. Online: You can apply for an education loan from the comfort of your home. Visit the lender's official website and apply for an education loan online, and the concerned person will get in touch with you as soon as they can. If you do not find the Education Loan section on the lenders website, simply tap on the 'Request a Call' option that most banks/financial institutions have on their website. You can then tell the Customer Service Representative about your requirements.

What are the benefits of an Education Loan?

• A student with no/less financial support from his/her family, aiming to pursue higher education, can fulfil their dreams with the help of an educational loan.

• Studying with an educational loan makes a student more responsible towards education and finances.

• Parents do not have to break their retirement or emergency funds to educate their children.

• Education loans generally have competitive interest rates across banks/financial institutions. They typically charge 1% to 3.5% above the Marginal Cost of Funds based Lending Rate (MCLR).

• A student can avail an education loan of up to Rs 1 Cr and up to 15 years of loan repayment tenure.

• It takes care of almost all the study related requirements so that a student does not have to worry about the expenses apart from college fees.

• Guardian/Parent can enjoy tax benefit up to 8 years on interest paid.

• Some leading banks offer loan disbursement before applying for a Visa.

• Many banks provide a door-step facility with an education loan. So, you do not have to step out to submit any documents as the bank representative will come and collect the required documents.

• Some banks offer a concessional rate of interest for female students, persons with disabilities, or children of bank employees, government employees, etc.

• A student can enjoy a moratorium period of 6 months to 1 year.

To Conclude:

Education Loan has been helping hundreds and thousands of students in pursuing their dream education and careers. It is a convenient way of financing high cost education for a student, without being a burden on the parents. We hope that the information provided in this article will help you choose the correct lender for your educational loan requirement. Do check the FAQs if you still have any doubts.

Frequently Asked Questions (FAQs)

My university has mandated all the international students to study from their respective countries due to the pandemic. How do I pay my university fees abroad?

Education loans are generally paid directly to the educational institutes abroad after converting the disbursed amount into their local currency.

Can I transfer my education loan to some other bank?

Yes, you can transfer your educational loan balance to another bank if it offers a better rate of interest. However, you should consider other charges, like processing fees charged by a new bank, refinancing fees charged by your existing bank, etc.

What if I get a job before my course completes and I discontinue the course?

You must start paying the EMIs as soon as you get the job.

Can I pay EMIs immediately after completing the course without having to wait for a moratorium period to get over?

Starting to pay your EMIs at the earliest is always advised. This period of relaxation is given for you to find a job. However, if you get a job before this period ends, you must start paying your EMIs.

What if I don't get a job even after the moratorium period?

You or the co-applicant will have to start paying the EMIs post moratorium period. Otherwise, you will be charged with late payment fees, which will affect your credit score.

Is academic performance considered while approving the education loan?

Yes, your academic performance is one of the major factors considered while approving the education loan. Besides academics, the course and the institute you choose, the loan amount, collateral, and repayment capacity of the co-applicant are important factors affecting your loan approval.

Can I get a loan without any collateral?

You can get an education loan without any collateral under various schemes offered by the government. However, the amount of an education loan without any collateral is limited to Rs 7.5 Lakhs.

Will it cover the entire expenses of my education?

Yes, most banks offer 100% financing. However, there is an upper limit for certain expenses, and if you need to cross that limit, you will have to pay it yourself.

For example, if you want to buy a laptop worth Rs 60,000 and your lender has an upper limit of Rs 40,000 on the laptop value, the bank/financial institution can offer to pay up to Rs 40,000, and you will have to pay the remaining amount of Rs 20,000 by yourself.

Do I get health insurance with my education loan?

Student Health Insurance cover is an extra feature that can be offered along with your education loan, but all banks do not offer it.

Should I prefer getting a loan from a bank or an NBFC?

Although NBFCs can have some flexibility in their terms, we advise you to prefer registered banks governed by the Indian Banks Association (IBA) and Reserve Bank of India (RBI). Registered banks are reliable and usually offer a lower rate of interest and maximum loan repayment tenure than NBFCs.

Warm Regards,
Ketki Jadhav
Content Writer

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