All You Need To Know About Education Loan

By Manish Shah

                                                                 

Education is one of the most important investments you will make in your life. And the returns from it will far exceed any other asset class. As someone once said, an investment in education pays the best interest. But good education, in India and abroad, has become increasingly expensive, putting it beyond the reach of many.

An education loan makes it possible for you to pursue their academic dreams. You can get an education loan for studies in India or abroad, graduate or post-graduate programs and professional or technical education. The interest rates, loan amounts, eligibility, schemes may differ among banks – some banks offer one loan that covers all courses; others may offer loans specially tailored for premier professional institutes.

The Reserve Bank of India, along with the Indian Bank Association, has formulated a set of guidelines called the Comprehensive Education Loan Scheme that most banks adhere to while extending education loans. These guidelines cover everything from approved courses to interest rates.

Courses covered

There are graduate or postgraduate degree and diploma courses from institutions recognized by the government bodies like the UGC, AICTE, AIBMS, and ICMR. You can check the courses listed on the UGC website, on the education portal of the National Informatics Centre and the AICTE website (www.aicte-india.org). There are many other professional and technical education programs – agricultural studies to fine arts; accounting to fashion, management to hospitality. You can also access a list of approved courses offered in India by foreign universities and research programs which are recognized and approved.

Expenses covered

There will be many expenses that you will face during your studies, these are:

• Tuition fees payable to the institution
• Hostel fees
• Examination, library and laboratory fee
• Insurance premium
• Books, study material, equipment, and uniforms
• Computer if required
• Study tours, project work, thesis
• Deposits (e.g., building fund)

Eligibility for education loan

• You have to be an Indian national, between 16 and 35. Your parent or guardian has to be a co-applicant. If you are married, your spouse can be the co-applicant.
• The lender will evaluate your financials and credit history just as with any other loan. Your guardian will have to submit income or tax documents in case you are not earning.
• Some banks evaluate your academic record and have a cut-off percentage. Others will look at your performance over the years. You will have to submit your mark sheets.
• You will need proof of admission from an approved institution.

Loan Amount

You can get anywhere from Rs 10-30 lakh as an education loan, based on your eligibility. The amount is paid directly to the institution. Some banks might give top up loans if you’ve opted for continuing your studoes after your course is over. But this has to be done during the moratorium period of the first loan.

How to repay

Banks offer a repayment grace period or moratorium after you complete your course. You have to start repaying the loan one year after your course ends or six months after you start a job, whichever comes earlier. Your repayment tenure can be 5-15 years.

The benefits of education loan are many, you can chase your dreams of a great academic career, pay it off when you start earning, there is no penalty on prepayment and best of all, and you get tax exemption under Section 80E of Income Tax Act. Continue reading on to know more about education loans:

Interest rates and benefits

The interest rate on your education loan will depend on many factors, including loan amount, tenure, course and college, your academic record, gender, credit risk, collateral, etc. Here’s what you should know:

• Banks charge a simple interest during your course and the moratorium. The interest amount is added to your principal when you start repaying.
• The rates of interest are charged in three slabs, according to the guidelines in the Comprehensive Education Loan Scheme. Loans up to Rs 4.5 lakh are interest-free. From Rs 4.5 lakh, banks will charge an MCLR-based rate. MCLR stands for Marginal Cost of Funds-based Lending Rate and is a way in which banks estimate their cost of funds. Each bank has a different MCLR. Banks will charge a premium (spread) above the MCLR on your loan, and this may vary from student to student. For example, the interest on SBI’s Student Loan Scheme for loans up to Rs. 7.5 lakh is 11.15%, 2% above its one-year MCLR of 9.15%.
• If you pay interest during the moratorium, you will get a 1% discount on the interest
• Girls get a 0.5% discount on the interest rate
• Economically-backward students are eligible for an interest subsidy during the moratorium

Margin required

• You don’t have to go out of pocket for loans up to Rs 4.5 lakh
• Between Rs 4.5 lakh to Rs 7.5 lakh, you will have to put down 5%. You can use a scholarship to fund this amount if you can get one.
• For loans above Rs 7.5 lakh, your down payment will be 15%. These may differ from bank to bank and year to year. Check with your bank.

Providing security

• Your parent or guardian or spouse have to be a co-applicant
• For loans above Rs 7.5 lakh, you will have to provide collateral
• You will have to assign the future income of the student towards payment of instalments
• Some banks may also ask you to get a life insurance policy in the name of the applicant and assign it to the bank

Other fees

• Banks don’t charge processing fees for domestic study loans. However, they charge a processing fee for loans for overseas education, but refund it when the course begins
• Some banks may charge a documentation fee

About the author:

Manish Shah is the Co-founder and CEO, BigDecisions.com. A graduate in Commerce, Finance and Accounting from R. A. Podar College of Commerce & Economics, Manish is an alumni of IIM Ahmedabad where he did his MBA specializing in finance, marketing and general management.