If you’re a student looking for the education loan to fund your higher studies, don’t just compare the interest rates banks are offering but repayment options, collateral and a host of other factors as well By Sunil Kumar Singh
Ten years back, education loan was considered nothing short of a bit of luxury which a few could afford. Today, lakhs of Indian students are studying not only in premier institutions within the country but in the ivy league institutions in the US and other countries with the help of the education loan. What was considered a privilege for the chosen few has now become a need for many.
If you’re the one looking to fund your dreams of higher studies, following are the finer points about education loan such as the eligibility conditions, documentation, interest rates, tenure, etc that can prove handy when it comes to borrowing this type of loan. However, do not forget to check with the bank you’re approaching for the exact terms and conditions of the loan as different banks have laid down different terms and conditions different interest rates, margin, minimum and maximum tenure, repayment period, coverage of expenses etc.
Let’s begin by understanding what an education loan is. Basically, education loan is a term loan lent to Indian nationals for pursuing higher education in India or abroad where the student has got admission. Besides, education loan is also offered for courses such as teacher training, nursing courses, vocational training and skill development study. Some banks offer education loan for studies from even nursery to senior secondary schools.
Further, no bank can refuse a student’s educational loan application on the excuse that the residence of the borrower does not fall under the bank's service area. In November 2012, the Reserve Bank of India (RBI) advised all scheduled commercial banks in a notification not to reject any educational loan application for reasons that the residence of the borrower does not fall under the bank's service area.
Are You Eligible
Higher education could include graduation, post-graduation degree or diploma courses in universities or autonomous institutions like IITs/IIMs recognized by UGC/ / AICTE/ AIBMS/ ICMR etc; regular/part-time approved degree/diploma courses such as aeronautical engineering, pilot training, shipping (approved by Director General of Civil Aviation/shipping), technical courses such as ICWA, CA, CFA, MBA from recognized institutes in India.
For education abroad, banks provide education loan for job0oriented professional/ technical graduation degree courses/ post graduation degree and diploma courses including MCA, MBA, MS, etc offered by foreign universities. For higher education in India and foreign, the applicant should be 16-35 years of age; must be an Indian national and must have a confirmed admission in the college/university/institution. The amount of loan could range from Rs 10 lakh maximum (for education in India) to Rs 30 lakh (for education abroad).
Collateral Options
Education loan is not an unsecured loan and banks ask for various types of collaterals depending upon the loan amount. Banks generally don’t ask for collateral/security for loan upto 4 lakh. Generally, for an amount upto Rs 4 lakh banks ask for parents/spouse/siblings to be primary co-applicants/co-obligators of the loan along with the student. In their absence, banks could ask for grand-parents/father-in law, motherin- law, brother-in-law, paternal /maternal uncle/aunt as co-applicants.
For loan above Rs 4 lakh upto Rs 7.5 lakh, banks ask for parents/guardian as co-borrowers as well as collateral security in the form of third party guarantor. And finally, for loan above Rs 7.5 lakh banks ask for tangible collateral equal to 100% of the loan amount apart from parents as coapplicants. These collaterals could be residential property papers, bank FDs, LIC policy, NSC or a KVP policy.
Interest Rates & Moratorium
The loan amount covers not only the fee of the college/ school/ university but a host of other heads. This could include examination/ library/ laboratory fee, insurance premium for the borrowing student, caution deposit, cost of books/ equipment/ uniforms/ computers, study tours, project work, thesis, travel expenses for studies abroad, etc.
Different banks charge different interest rates on the education loan. However, since education comes under priority sector lending banks are more flexible when it comes to interest rates on education loan and charge it as per the corpus of loan you want to borrow. For instance, for loans upto Rs 4 lakh SBI charges 13.50% p.a (3.50% above Base Rate i.e. 10%) as per the information available on its website. Further, above Rs 4 lakh and upto Rs 7.50 lakh, the bank charges 13.75% p.a (3.75% above Base Rate) and 11.75% p.a. (1.75% above Base Rate) for loan above Rs 7.50 lakh.
Similarly, for loans upto Rs .7.5 lakh, Bank of Baroda charges Base Rate + 2.50% while for loans above Rs 7.50 lakh, it charges Base Rate + 1.75%, as per the latest information available on its website.
The repayment period also differs depending upon the loan amount. Generally, for loan amount of Rs 4 lakh to 7.5 lakh, the repayment period is 10 years while it is 12-15 years if the amount is more than Rs 7.5 lakh. There is a repayment holiday/ moratorium period on loan repayment which is the coursework duration + 1 year or 6 months after the students gets a job, whichever is earlier. After the moratorium period is over the repayment of the loan starts.
Tax Benefit
Repayment of an education loan is subject to deductions under section 80E of the Income Tax Act and you as a borrower are eligible for a tax rebate for the interest you pay on an education loan.
As Rashmi Roddam, Director, WealthRays group says, “Under Section 80E of Income Tax Act , one can claim interest deduction on loans taken to fund studies in India and also abroad. The tax benefit can be claimed for a maximum of 8 years beginning from year in which one starts paying interest on loan and for seven consecutive years after that. 80E deduction is over & above 80C deduction & there is no maximum limit to claim deduction for educational loan. However, deduction is available only on interest paid on educational loan & not on principal repayment.”