Student Loan: You Should Know This Before Taking An Education Loan

The first step toward a successful career is a Graduate Degree or Master's Degree from a reputed institute of higher education with high scores. But achieving this requires more than just a stellar academic record, hard work and commitment. Owing to the rising costs, education has become expensive too. In India, not all parents are capable of funding their wards’ higher education in a top university. Professional courses in even public institutions, and private colleges, can be prohibitively expensive for many families. One way of overcoming this problem is with education loans.

Along with public and private sector banks, many non-banking finance companies and fintech, or financial technology, platforms offer student loans. In general, there are two broad categories of education loans – domestic and for studying abroad. This allows them to postpone paying for their education until they are employed. Student loan interest rates tend to be over 6%.

Also Read | How 3 Professionals Are Repaying Their Education Loans

While opting to take an education loan, one should always be cautious. Don’t join a course in an institute just because it has tie-ups with financial institutions and loans are easily available. Several institutes offering poor quality educational programmes try to attract students by showcasing their tie-ups with banks and financial institutions. Many times, students fall for such offers and ruin their careers. Therefore, the selection of the institute or college should be a priority.

Based on the course selected by the candidate, they can avail different types of student loans including undergraduate education loan, professional or graduate education loan and career education loan. A loan, no matter what kind, is always a liability so, one must keep in mind a few important things before taking one.

Following are a few key things that should always be kept in mind before taking an education loan.

Vidyalakshmi Education Loan

The Ministry of Finance and Department of Higher Education in collaboration with Indian Banks Association (IBA) has developed the Vidyalakshmi portal. It is a single window for students to access the information about educational loans and government scholarships. To apply for a loan scheme, students have to sign up or register. The Common Educational Loan Application Form (CELAF) is a single step procedure to apply for an education loan to multiple banks or schemes. Using the CELAF, a candidate can apply in a maximum of three banks on the Vidyalakshmi portal. The banks update the application status in the portal. Once the loan is approved, the amount gets transferred into the bank account of the candidate.

Education Loan Eligibility

Terms and conditions of loans vary from bank to bank. The two most common and major eligibility criteria are that the applicant must be an Indian citizen and should have taken admission in a recognized university or college. A student can avail the loan with the parents or guardian, spouse or sibling as co-applicants.

Basically, the student for whom the loan is taken is considered the main borrower. Education loan interest rates vary across banks. The SBI education loan interest rate is 6.8 % to 8.5% per annum; the Canara Bank education loan rate typically ranges from 6.90 % 8.90% per annum.

Documents Required

The list of documents to be submitted varies across lenders. For example, documents required for SBI education loan include copies of letters conferring scholarship or freeship whereas, HDFC education loan doesn’t require the scholarship documents. Similarly, minute variations exist across different banks. Some of the commonly required documents for all educational loans include the following:

• A copy of the admission letter with the complete fee details,

• KYC documents of the student including address proof. This could be:

Voter ID

PAN card

Aadhar card

Passport

Driving licence

• Mark-sheets of Class 10 and Class 12

• Degree certificate

• Updated bank statement or passbook showing entries for the previous six months

Education Loan Collateral

Banks or lenders will typically ask for a guarantor before taking an education loan in case of any default on the loan amount. Usually, the student's parents or guardians are considered guarantors. If the loan amount is higher, over Rs 7.5 lakh, the lender may ask for a third-party guarantor. A third-party guarantor is an individual other than the bank or borrower who guarantees the loan will be repaid on time and places his assets as collateral. Collateral is needed for education loans above a specific amount, which can vary from bank to bank. The assets typically used as collateral are property papers, gold, and insurance papers.

Education Loan Without Collateral,

If a student borrows Rs 4 lakh or less, the loan is granted without a collateral.

Student Loan Interest Subsidy

The Ministry of Education launched the Central Sector Interest Subsidy (CSIS) scheme in 2009. This scheme provides full interest subsidy during the moratorium period on education loans without collateral or third-party guarantee. The maximum loan amount covered by the scheme is Rs. 7.5 lakh for pursuing technical or professional courses in India only. Students whose annual gross family income is up to Rs.4.5 lakh are eligible.

This scheme is adopted by all scheduled banks and is linked with the IBA’s Model Educational Loan schemes. It is restricted to students enrolled in professional or technical courses accredited by the National Assessment and Accreditation Council (NAAC) or the National Board of Accreditation NBA, or offered by Institutions of National Importance or Central Funded Technical Institutions (CFTIs). Institutions and programmes that do not fall in the above groups need the approval of the relevant regulatory body.

Tax Benefits

Depending on the institute where the student has taken admission, certain concessions may be offered by lenders. Section 80E of the Income Tax Act allows for deduction on the interest paid on the repayment of education loans. This deduction is allowed only for the individuals paying interest on the loan for himself, spouse or children or for the student to whom one is a legal guardian.

Concessions For Women Students

Moreover, in case of female students, a concessional rate of interest can be availed or asked for. Many banks in India, especially government-owned banks, offer special schemes for female students. For example, IDBI bank provides a special education loan for women to cover the expenses of specialised courses such as aeronautics, shipping, pilot training and other professional courses. Some banks offer 1% lower interest rate on education loans for girl students for their higher studies. In some cases, subsidies are offered by the government on the interest levied over the loan amount to girl students during the tenure of their studies. Some examples of such loan subsidy schemes include the Corp Vidya Scheme, Indian Overseas Bank education loan, and Central Bank of India Cent Vidyarthi.

Loan Processing Time

Instant approval of an education loan happens when the candidate is taking a loan against a security such as a Fixed Deposit (FD). Otherwise, the loan processing time is directly proportional to the amount of loan to be taken and the need for collateral. The loan amount can be handed out within one week to two months, depending on the verification and pre-sanction inspection process.

Education Loan Interest Rate, Repayment

The student loan interest rates and repayment modes vary across banks and lenders. A thorough research into rates of interest and repayment methods is necessary as both vary widely. The factors which influence the rate of interest are academic record of the student, collateral provided by the student, the reputation of the college or university, income of joint borrowers and their credit history, and the economic condition of the country. A typical education loan of Rs 4 lakh or less comes with an average interest rate of 10% - 15% for a three-year duration of repayment. A shorter duration may seem scary but it prevents you from paying huge amounts of interest over a longer period of time. Under the CSIS scheme, there’s a one-year moratorium period, that is, a student can start repaying one year after they graduate, or six months after getting a job.

Also Read | Student Loan: 8 Points On Education Loans, Interest Rates, Eligibility

Loans For IIT, NIT, IIM Programmes

The Education Ministry announced an interest-free education loan scheme for the students studying in Indian Institutes of Technology (IITs), Indian Institutes of Management (IIMs), and National Institutes of Technology (NITs). This scheme is applicable to students whose family income is less than Rs 9 lakh per annum. Students can take a maximum loan of Rs 20 lakh to Rs 30 lakh. There is a 0.5% concession on loans for female students. The interest rate of the premier education loan is less in comparison to Type C or B (state or local colleges) institutions. No collateral is required for premier loans and the student's parents have to become the guarantor or co-borrower in most cases. The margin is either very low or nil for all the premium education loans. No processing fee is charged from students. The repayment tenure is 15 years.

Future EMI Burden

Students seldom earn much in the initial stages of their careers, right after graduation. When the loan amount is more than Rs 4 lakh, it is always a good idea to opt for longer loan tenures, more than 8-12 years. This helps in repaying the loan amount with relatively smaller monthly installments, or EMIs.

Default In Payment

There may be situations where a student is unable to land a job immediately after graduation. In such scenarios, there is a very high chance of defaulting on payment of the EMI on time. Failing to repay the education loan EMIs on time can lead to several problems with lasting impact – a poor credit report and appearance of names in CIBIL defaulters’ list among others. Defaulters will be denied any sort of loan in the future and may even lose assets pledged as collateral.

The probability of getting an education loan is higher when one joins a highly-reputed institution or university which promises better job prospects. Further, the academic record of the student also plays a major role. If one repays the loan on time without any defaults in payments, it becomes easier for one to apply for other loans like home loan, car loan, personal loan etc. in future.