With premier colleges and universities hiking their fee every year, it is becomes increasingly difficult for the majority of the population, the middle class, to afford education. This is where education loan comes in. Introduced in 1995 by the State Bank of India, it has offered assistance to lakhs of students. Other banks followed thereafter and became a huge hit.
What is an education loan?
An education loan can be availed by any student enrolled in either a graduate or post-graduate degree in any stream. Some banks have a certain list of courses they offer the loan to, example medical, dental, management, etc. The loan is offered to students who want to study in India as well as study abroad.
Education loan not only covers the course fee, but also accommodation fee, examination fee and other miscellaneous expenditure that may arise during the course of the degree.
Education loan eligibility
Before the loan is sanctioned, the bank looks at the family income, reputation of institution, type of course. These institutes have to be pre-approved by the government, UGC, AICTE, AIBMS or other regulatory authorities. Some banks offer the loan even before the student has secured admission in a university.
Money borrowing is classified into three categories:
- Borrowing up to Rs. 4 lakh: No security required but parents have to be joint borrower.
- Borrowing between 4-7.5 lakh: Collateral security is mandatory in form of third party guarantee
- Borrowing above 7.5 lakh: A collateral of equal value is required
Depending on the amount, banks also finance 100% of the amount require. In most circumstances, for studies in India, the student is expected to pay 5% of the amount. If it is for studies abroad, the amount to be financed by the student is a little higher, at 15%. Once the loan is sanctioned, the amount is directly paid to the college/institution.
Education loan repayment
As compared to any other loan, the moratorium period for education loans is the longest. Moratorium period is the time between borrowing the money and starting to repay the amount to the bank. There are three types of repayment options:
- Most banks expect you to start paying after one year of completion of course or within 6 months of getting a job, whichever is earlier.
- Another type is when only interest is paid to the bank during the period. After completion of course, you start paying the principle along with the interest (EMI).
- In this method, you start repaying the EMIs as soon as the loan is disbursed, but the interest rate will by 1% lower than the regular rate.
As different banks have different repaying procedures, so make sure you select one from a bank which suits you the best.
There are two types of interest rates available: fixed and floating. Fixed rates are usually low risk and are the safer option. Their repayment tenure is 5-7 years. Floating rate is the current rate that’s going on in the market. It has a higher risk as it can go up anytime. But for those willing to take the risk it is a good option as there is also a possibility of the rates going down. Due to its high-risk nature, people prefer to opt for fixed interest rates. The difference between fixed and floating rate is about 1%.
While taking a fixed rate, make sure it doesn’t come with a reset clause. That allows the bank to reset the interest rates as they want. IF the fixed rate is coming with a reset clause, it is better to opt for a floating rate.
Some other features to keep an eye out for are the processing fee and the girl child advantage. Most banks do not charge a processing fee for education loans. If it is being charged, it can be asked to be waived off. Also, many government-owned banks are offering an interest rate 1% lower than regular rates to girl child. This is an initiate in supporting girl child education. So make sure to ask your bank for this feature before the loan is sanctioned.
Best education loan repayment procedure
- Avoid defaulting: If you fail to repay your EMI after an overdue of 90 days, it amounts to a default. A default not only puts you at risk of losing your collateral, but also ruins the credit score of the student as well as the parents (the co-borrowers in most cases).
- Capitalise on Exceptions: Education loans comes with a lot of benefits. Women are availed a lower interest rate. Differently-abled students get a subvention on the interest. Meritorious students are given concession from paying their 5% of the fees.
- Try and pay the interest during moratorium period: Students who pay the interest in this period not only get 1% concession, but it also recues the EMIs to be paid after the study period.