Education Loan

What is an Education Loan?

Education and academic excellence are considered to be very important in India. An education loan is a loan that helps facilitate young minds to pursue their academics further, either in India or aboard by providing them with a loan amount to fund their higher education. This is very advantageous when the child does not have adequate funds to pursue his/her higher education. An education loan can be availed for an undergraduate degree, a postgraduate degree or a PhD.

The loan repayment is done only when the student completes his/her course and finishes a grace period of 6 months or one year wherein he/she can join a job and start making money.

Features and benefits of an Education Loan

• Good loan amount

Maximum loan amount of Rs. 50 Lakhs can be obtained as an education loan for domestic institutes and up to Rs.1 crore for international institutes. So, the loan amount can be availed based on the tuition fee for the institution. In some cases, living expenses are also covered by the bank along with other needed expenses for the education such the cost for books, a laptop and more.

• Flexible tenures

Education loans have tenures that can extend up to 10 to 15 years. This reduces the EMI burden on the student, and he/she can repay the loan amount with ease in time after the moratorium period.

• Good education

A major benefit of taking an education loan is that the student gets to afford a good education that can help him/her in the long run by getting a good career and getting settled for life. It helps one achieve academic excellence that adds to a resume to enable one to get into a reputed company thereby giving one job security and job satisfaction for life.

• Tax benefits

The interest paid on the education loan can be claimed as a tax deduction as per section 80E of the Income Tax Act that was passed in the year 1961. However, the income tax benefit can only be claimed on the interest of the loan and not the principal amount as it does not qualify for it.

• Government subsidy

The Government of India has a scheme to help the weaker sections of society to enjoy education and not deprive them of the same due to insufficient monetary funds. According to this, the Government of India provides full interest subsidy during the moratorium period which is during the entire course period plus an additional six months of one year after getting a job, whichever is sooner.

• Moratorium period

The repayment on the education loan does not begin right after he/she finishes his/her course. The banks provide a holiday period of one year or six months after course completion which is called the moratorium period. So, one does not need to repay the loan during this one year, but the interest rate will be applicable for the year. This helps the student get a job to help repay the loan and this lessens the burden on the student by a great deal.

• Collateral free loans for premier institutions

A very big advantage in an education loan is that if the student gets an admission into a premier institute such as IIT or IIM, then the entire loan amount can be taken collateral free. If the institute is not a premier institute, then only up to 4 lakhs can be taken without collateral. Loan amounts that are higher than 4 lakhs require collateral in most cases.

Interest rates

The interest rates for an education loan generally begin at just 9% and can go upwards. Most interest rates are fixed at the sole discretion of the lender and can vary based on certain factors.

Factors that affect interest rates for an Education Loan

• Type of educational institutions

  If you are joining a reputed institution like IIT, IIM or similar universities abroad, then the interest rate that is charged for an educational loan is much lower. Also, collateral is not required for such universities. This is very beneficial for academically excellent students.

• Gender:

  Girl students get a lower interest rate than boy students in most banks. This is to promote the girl child to study and help her achieve academic excellence with the same opportunities provided to the male students in the society.

• Parents with a good credit score:

  Educational loans are provided to the student along with their parents who are considered as joint applicants. If the parents have a good credit score, then the interest rate that is offered is generally lower as they are considered as creditworthy customers and thus reduces the risk factor to the bank.

• Tenure:

  A shorter tenure than a longer tenure can make sure that the outflow of money towards the repayment of the interest is lower. The longer the tenure, the more the money spent on interest.

• Credit score:

  If the student himself/herself has a good credit score, it can be very useful to lower the interest rate on an educational loan. The better the credit score, the lower the interest rate charged. A credit score above 750 is always best to be considered a creditworthy customer.

• Relationship with lender:

  If you have a good and healthy relationship with the lender you are borrowing from and are an existing customer with them, then the interest rates can be negotiated for and one can get a lower interest rate. This can help you lower the interest rates on your education loan. Most lenders aim to please their customers and so they can lower the interest rates if you have a positive and long relationship with them.

Eligibility criteria for an Education Loan

• Should be an Indian citizen
• Should be a minimum of 16 years old and a maximum of 35 years old
• Should have finished 10th std and 12th std
• Should have received an admission letter or invite for the course needed from the University or Institution
• Parents are required as joint borrowers for the loan
• If the loan amount if high (generally above 7lakhs or 10lakhs) collateral might be required.

These eligibility criteria can vary from lender to lender and so it is best to check with the lender you are borrowing from as to what their eligibility criteria are.

Documents needed for an Education Loan

For the student

• The Institution’s admission letter along with the fee break-up
• 10th and 12th graduation mark sheets
• Identity proof
• Age proof
• Address proof
• Signature proof
• Application form that is completely filled out
• Latest passport size photograph

Identity proof, age proof can be submitted with Aadhar card, passport, driver’s licence or voter’s ID. Address proof can be submitted with Aadhar card, ration card, passport, telephone bill, electricity bill or voter's ID card.

For the parent

• Income proof
• For salaried individuals – Salary slips and bank statements for 6 months
• For self-employed individuals – Income Tax Returns, bank statements and proof of turnover

Documents needed can vary from lender to lender and so it is best to check with the lender you are borrowing from as to what are the documents needed.

Apart from this there are some procedures like signing of the loan agreement by the applicant and the parents, repayment instructions to be followed and the copy of the payment receipt of given by the institute to be submitted.

How to apply for an Education Loan

• You can apply online by filling in the application form and turning in all the required documents.
• You can apply in person by visiting the lender’s branch with all the needed documents and filling out the application form for the same.

Education Loan – FAQs