“Education is not preparation for life; education is life itself", goes a saying. It is everybody’s dream to study in top colleges and universities be it in India or abroad.
Parents want their children to get a good degree from a reputed institution as it guarantees lifelong income and success. However, the cost of getting a good education is becoming expensive day by day with institutions charging exorbitant fees. While only a few parents can afford to fund their child’s education, for millions of other aspirants education loans are the channels to fulfil their dreams.
The education loan segment is dominated by public sector banks which account for 90 per cent of such loans, while the rest were funded by private sector banks and NBFCs. Non-performing assets or NPAs accounted for 8 per cent of the total outstanding education loans of Rs 80,000 crores.
Here’s the lowdown on education loans:
Purpose of education loans
It helps one pursue undergraduate, graduate, or postgraduate courses in various streams including engineering, medicine, management and information technology. The loan covers expenses incurred for tuition fees, hostel fees, the cost of books, laptops, and examination and library fees. Other expenses related to completing the course like study tours or project work are also included in the loan amount.
Quantum of loan & down payment
The quantum of the loan can vary depending on the total course expenses and the income of the borrower and their parents. Many banks give loans up to Rs 1.50 crore for studies abroad at top universities. Incidentally loans up to Rs 20 lakhs come under priority sector lending.
Generally, banks don’t insist on a down payment or margin requirement for loans up to Rs 4 lakhs. For loans exceeding that amount, the margin is 5 per cent for studies in India & 15 per cent for studies abroad.
Interest rate
Interest rate is higher in the case of education loans because of their very nature of being unsecured. You can opt for either a fixed rate or a floating rate. The interest rate varies as per the category of the university which can be either AA, A, B, or C for IIMs and AA for IITs. The interest rate will be upwards of 10 per cent for admission to colleges outside the category or list of premier institutions. A few banks give a concession in interest rates for girls and for those borrowers who take a life insurance policy and assign it in favour of the bank.
Moratorium & repayment period
Most of the banks give a moratorium period (holiday period) of up to one year after completion of the course or six months after getting a job whichever is earlier which means you don’t have to pay the EMIs during this period. You have the option of paying the interest during the holiday period. The repayment period can be between a few years to a maximum of 15 years depending on the loan amount.
Collateral security & documents required
Most of the banks don’t insist on collateral security for loans up to Rs 7.50 lakhs. For loans above RS 7.50 lakhs, banks insist on collateral security like fixed deposits, life insurance policies, or land & building.
Other than the usual documents like the ID proof, address proof of the borrower and the co-applicant who will be the parent or the guardian, and income and bank statements, the most important document will be the admission letter or offer letter from the university giving a breakup of fees. For studies abroad, you need to produce your Passport, and TOEFL, IELTS, GRE, and GMAT scores, whichever is applicable. The co-applicant needs to have a good CIBIL score of around 700 so that the loan is not rejected.
Tax benefits on education loans
The interest you pay on your student loan can be claimed as a deduction under Section 80E of the Income Tax Act of 1961 without any ceiling. You can claim the benefit for eight years from the day you started repaying your loan or until the interest component is paid off. The Credit Guarantee Fund Scheme for education loans provides a guarantee to banks for the education loan to deserving and eligible students up to Rs 7.5 lakh.
Vidya Lakshmi Portal
Under the Pradhan Mantri Vidya Lakshmi scheme, the government provides assistance through Vidya Lakshmi Portal. The portal provides a single window for students to access information about various education loan schemes provided by banks and apply for a Loan. You can download the loan application form and apply to multiple banks for educational loans. You can also check the status of your loan application through the portal.
(The author is a Chartered Financial Analyst (CFA), a former banker and currently teaches at Manipal Academy of Higher Education, Bengaluru)