In today’s competitive world, education is more than just a pathway to personal development; it’s a critical investment in one’s future. However, the escalating costs of higher education can pose significant financial challenges for many parents, even those who start saving early. This is where education loans come as a lifeline, enabling students to pursue their academic dreams without the immediate burden of tuition fees and related expenses.

Yet, navigating the landscape of education loans can be daunting, with numerous factors to consider — from interest rates and loan tenure to collateral security and repayment terms. Whether you’re planning to study within India or abroad, it is essential to make informed decisions about your loan options.

Requirements

The eligibility criteria for education loans vary among banks and non-banking financial companies (NBFCs), but there are common requirements that applicants generally must meet. Firstly, the students of Indian nationality should have secured admission to a recognised educational institution, whether in their home country or abroad.

Additionally, co-applicants, usually parents or guardians, will be required to apply for the loan along with the borrower (the student) to safeguard the lender’s interest in the event of default. The creditworthiness of the co-borrower, including their income and credit score, plays a crucial role in the loan approval process. Another requirement is the presence of collateral. While lenders might require collateral such as property or fixed deposits for loans with higher amounts (usually above ₹7.5 lakh), many banks offer unsecured loans to premier institutions in India, such as IITs and IIMs, due to the increased likelihood of loan repayment.

Borrowers are also required to contribute a portion of the total loan amount, known as margin money, which might be 5-10 percent for domestic education and around 15 per cent for overseas education. However, NBFCs such as HDFC Credila and Avanse offer up to 100 per cent financing without any margin requirement. Additionally, some international lenders, including Mpower and Prodigy Finance, offer education loans for select courses and universities abroad without requiring collateral, margin, or even a co-applicant.

Other considerations

Interest rates are among the most critical factors to consider when opting for an education loan. These rates can be either fixed or floating. Fixed interest rates remain constant throughout the loan tenure, providing stability in your repayment schedule. In contrast, floating rates fluctuate based on market conditions, which can potentially increase or decrease your monthly EMIs. Banks determine the interest rate by adding a spread to the base rate (generally the repo-linked lending rate), with the spread based on an individual’s overall credit and course profile.

Repayment begins after the moratorium period, also known as the EMI holiday. This period typically encompasses the duration of the course plus an additional six months to a year after course completion, allowing students time to secure employment. However, interest may continue to accrue on the loan amount during this period, either as simple interest or compound interest, depending on the loan terms. It is generally advisable to pay the interest during this period to alleviate the repayment burden. Repayment periods can extend up to 15 years.

Among financial institutions, while NBFCs charge the highest rates of interest, followed by private and public banks, they offer faster loan processing compared to banks. Some lenders offer preferential rates for students admitted to premier institutions or for courses with high employability potential. For domestic education loans from banks (excluding NBFCs), borrowers from economically weaker sections of society (with an annual family income of up to ₹4.5 lakh) can apply for the Central Sector Interest Subsidy (CSIS).

This subsidy covers the interest accrued on the loan amount (up to ₹10 lakh) during the moratorium period and also sanctions loans without collateral or a co-applicant up to ₹7.5 lakh. Additionally, female students can avail of a concessional interest rate of 50 basis points from banks. Borrowers can also claim a tax deduction on the interest paid (with no maximum limit) under Section 80E of the Income Tax Act.

Do your homework

Understanding what the education loan covers is also essential. Typically, it can cover a wide range of expenses beyond just tuition fees, including the cost of books, study materials, accommodation, travel expenses for studying abroad and, sometimes, even daily living expenses.

However, the extent of coverage varies between lenders and specific loan products. Loan applications can be made online via the Vidya Lakshmi portal, maintained by the NSDL e-Governance infrastructure, which allows students to apply to three banks of their choice, compare schemes, and track application status. By thoroughly researching and comparing loan options, borrowers can secure the necessary funds to invest in their future.

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