Some of the common ways of funding higher education is through using family savings, borrowing from friends and relatives, selling assets like land, gold etc. or taking an education loan . Earlier, it was believed that only people from the middle- income group choose to fund their education through student/education loans. With benefits of an education loan coming to the fore and specialists like HDFC Credila offering doorstep service, many affluent families are also opting for an education loan and availing of exclusive benefits like:
- Income Tax benefits under section 80E of IT Act
- Opportunity for students to take their own financial responsibilities
- Preserving their family savings
- Building a good credit history
Hence, education loans have clear advantages over using personal finance
It covers the basic course fee and other related expenses such as (college) accommodation, books and other resources, exam fees, and other miscellaneous charges.
To be eligible for an education loan, you should be at least 18 years of age. Some lenders require parents to take loan on behalf of the student if the student is dependent upon his parents for his livelihood. Other lenders may ask the student to be a co-applicant along with one or both parents or legal guardian. Siblings can also be co-applicants under certain circumstances.
Loan is usually offered to students who want to pursue higher studies in India or overseas. The maximum amount offered for studies in India and overseas are different and varies from one bank to another.
In case the student is under 18 or dependent upon his parents, one or both parents can take loan on his behalf or become a co-applicant depending upon the student age, status, and lender policies.
It is prudent to mention that given the intent or purpose of the loan, it is the student who is primarily responsible for repayment of the loan. The co-applicant will become responsible in the event the student fails to repay the loan.
This depends upon how much you need. If you are using the loan to supplement a scholarship or grant, you stand a good chance of the entire requirement being sanctioned. If your requirement is above 4 lakhs (as per current rules) most lenders will ask for margin money (down payment) which means you will have to fund part of your education yourself.
If you are studying in India, the margin money is usually 5% of your requirement. In case of study abroad loans it may be as high as 15%.
The amount sanctioned may also depend upon the earning capacity of the co-applicant, the course applied for, and a few other factors.
For study abroad loans, Indian banks usually grant up to 90% of the total expenses.
Lenders usually do not specify the courses for which loans may be taken. That said, they do need assurance that the student will be capable of repaying the loan – which effectively means that the student should become gainfully employed after completion of the course. With that in mind, many lenders demand proof of admission into a reputed or accredited college or institution.
With that said, some of the the most popular courses for which students avail loan include graduation or post-graduation in the fields of engineering, management, medical, hotel management, architecture, etc.
Indian citizens who are aged 18 or above may apply for student loan. Some of the commonly demanded documents for availing an education loan include –
- KYC documents – Aadhar Card and Pan Card as proof of identity and residence
- Proof of admission to a reputed institution in the form of fee receipt or letter of admission.
- Duly completed application form
- 2 – 3 passport size photographs
- Certificate of graduation or High School certificate
- Proof of age – some lenders may demand a separate proof in addition to Aadhar Card
- Signature verification by bank
- Proof of income of the student, parent/s, legal guardian or other co-applicants
- Documentation for any collateral offered where applicable such as insurance policy or title to property.
- Details of any scholarship or grant received in cases where the loan supplements such grants or scholarship.
In addition to the above students who wish to study abroad will also need to submit the following:
- Proof of admission is mandatory for study abroad loans
- Course schedule and fee structure details
- Copy of foreign exchange permit
- Bank statement of the last six months of the borrowers’ or co-applicants account
- Last 2 years’ ITR of the parent, guardian, or co-applicant
- Advocate’s letter reporting the marketability of collateral where applicable.
- Proof of source of margin (down payment) where applicable
The banks also ask for collateral for loans above Rs 7.5 lakh. Presently, the banks do not ask for any collateral or third-party guarantee for loan up to Rs 4 lakh. For loans above Rs 4 lakh up to Rs 7.5 lakh, a third-party guarantee is required. Collateral is asked for loan exceeding Rs 7.5 lakh.
The EMI or Equated Monthly Installments for your loan depends basically on three factors – the amount of loan, interest, and the duration of the loan. If your loan has a moratorium period, the interest accruing during that period will be added to the repayable amount. Some lenders also add any processing fees and other charges to the repayable amount while others require you to pay these charges upfront.
The student taking the education loan is expected to repay it once he starts earning. Many lenders allow a short period after completion of the course until such time the student secures a job called the moratorium period. No EMI installments are required to be paid during this period but interest will accrue and be added to the repayable amount.
The moratorium period is usually six months to a year or until the date you secure a job whichever is earlier. Some lenders allow a further period of six months after securing the job as moratorium period.
Unlike other loans, repayment of student loan begins only after you have completed the course – and often after you have secured a job. Many lenders allow a period of grace after course completion called toe moratorium period. Your EMI for loan repayment will begin after this moratorium period.
Depending upon several factors, you may also be eligible for a top up loan for further studies over and above the existing loan. You should discuss this with the lender.
The primary purpose of a student loan or education loan is to help you pursue your academics and secure a well-paying job of your choice. That said, if it so happens that you are unable to repay the loan, it will then become the responsibility of your cosigner or co-applicant to repay the loan. Many institutions even grant a top-up even when a student fails a subject or two.
You should know however, that these decisions are taken on a case to case basis at the sole discretion of the lending authority.
Yes you may. Usually when a borrower repays his loan earlier than scheduled, banks and other lenders charge a penalty for early repayment to cover administrative and other costs. However many lenders do not charge this penalty for student loans. You should discuss this possibility with the lender early on – before you take the loan.
A loan margin is an amount put up by the borrower expressed as a percentage of the loan amount. Many lenders in India require the borrower to put up part of the course fees as margin money. For instance, if the tuition fee for your course is INR 50 lakh, and the margin money requirement is 5% you – the borrower will have to pay 2.5 lakhs and the rest will be provided as loan. In India no margin money can be demanded for loans of up to 4 lakhs and for loans up to 7.5 lakh, lenders usually require a margin of 5% of the course fees. For loans of higher amount margin is at the discretion of the lender and may be decided on a case to case basis.
Yes. This situation may arise when you need a loan in a hurry and cannot wait for the sanction process to be completed. In such situations, some students take loan at higher rate of interest and later transfer it to a bank or lender offering lower interest.
To do this you should:
- Obtain a loan schedule or statement of outstanding loan from your old lender and submit it to your new lender.
- The new lender will conduct their own proceedings for granting loan
- Once sanctioned, the loan will be disbursed to you and you can pay off the old lender.
Worth mentioning here that you should compute any administrative processing and other charges applicable vis a vis your outstanding loan to see the benefit accruing to you by the transfer.
The requirement of collateral varies from one bank to another, however, the following is generally the thumb rule:
- For loans up to Rs. 4 lakh – No collateral or Third Party Guarantee is required.
- For loans from Rs. 4 lakh to Rs. 7.5 lakh – Collateral is not needed but no third-party guarantee is required
- For loans above Rs. 7.5 lakh – Collateral is required. Some of the key types of collateral accepted by banks include Insurance policy/NSC/KVP, Fixed Deposit held with the lender, property owned by the applicant or co-signor.
The tuition and hostel fees are disbursed directly to the institute as per their schedule and fee structure usually in the form of a draft. Other components of the loan such as course-related expenses for lab equipment, laptop computer, uniform, travel expenses etc. may be claimed by and provided to the loan applicant.
The interest portion of your EMI is available as deduction under section 80E of the Income Tax Act. This is in addition to the deduction allowed under section 80C. Deductions will be allowed only after EMI commences and will accrue to the student. Deductions may be availed till such time EMI is payable for a maximum of 8 years.
Most banks do not levy prepayment penalty on education loan. However, it is best to check with the bank before signing the loan agreement.
Earlier, banks insisted that the borrower have an account in the bank from where he hoped to take a loan. This is no longer mandatory. However, you must have an account in any Indian bank as loan amounts are usually disbursed into your bank account. Having an account in the same bank from where you take the loan can speed up the process and work in your favor – especially if you or your co-applicant has a long standing account in the bank.
Yes, this is possible. You can borrow a loan for a bachelor’s degree followed by one for master’s without repaying the first loan. The loan for your master’s degree can be taken as a top-up of the existing loan. However top-ups are at the sole discretion of the lender.
When you take a loan as a top up, it will usually be disbursed when your new course commences. In general the requirements for a top up will be similar to those for your primary loan.
On a note of caution, the amount of EMI will increase to include the new loan and interest there on as well as to cover the extension of the existing loan. It is advisable to discuss this with the lender at the time of taking the primary loan so that you know what to expect and can prepare for it. Knowing in advance will also save time at the time of applying for top-up.
As per RBI guidelines students going overseas for education are deemed to have NRI status. As such the same rules apply to the students as to NRIs. However, students are eligible to receive additional remittance up to USD 1lakh from close relatives in India as maintenance expense. This may include academic expenses too.
Yes certain concessions are available as below:
- Female students receive a reduction of 0.5% in interest rate for higher studies.
- Eligibility criteria, margins and certain conditions are relaxed for people form marginalized sections of society for loan taken for graduation or post-graduation.
- Margin money may also be waived for students from marginalized sectors.
The interest rate of educational loan depends on two factors: the amount taken by the student and the bank that has issued the loan. Usually, the interest rate of student loan varies from 11.25% to 13.5%.
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The details mentioned here are true and accurate to the best of our knowledge. They are also subject to change. You should talk to the lender about specific details not mentioned here.