Everything About Education Loan You Need To Know
Nov 02, 2017

Author: PersonalFN Content & Research Team

live page imageMeera is Mr Rajesh and Asha Mishra’s only daughter. And, they wanted to provide her with the best of everything. They believed in Meera’s overall development and their top most priority was her education. Every year, they directed investments worth approximately Rs 2 lakh towards this financial goal.

But, life is uncertain and one grave situation can compel us to change plans in life. Three years ago, misfortune shook-up their plans when Asha was detected with cancer. Not only were they emotionally and mentally drained, this medical emergency left them in a vulnerable spot financially too. They were forced to dip into the funds they had been saving for Meera’s education.

In times where the entire world is turning into an intellectual-knowledge economy, they realised they cannot deny the importance of education. They believed that better education opens doors to a good life. Along with the high cost of living, the cost of education, medical facilities, etc. is sky rocketing too. 

Mr Rajesh soon started looking for various financing options and decided to opt for an education loan. The scenario today is unlike the yesteryears, when a few thousand rupees were enough for one to complete one’s education until graduation and beyond. Therefore, those who cannot raise adequate funds from their own sources especially for higher studies, often opt for an education loan

Banks and Non-Banking Financial Companies (NBFCs) too have ventured into offering education loans, aiding today’s youth to get all geared-up to be a part of a knowledge economy.  They offer education loans at attractive interest rates for a loan amount ranging from Rs 5 lakh to Rs 75 lakh.

The education loan is also available for career-oriented course such like medicine, engineering, management, etc. either at a graduate or post-graduate level in prime institutes in India and abroad. The loan covers tuition fees, examination fees, library subscription, cost of books, needed lab tools/equipment, laptop/computer, hostel charges (if any), and so on.    

Who is eligible for an education loan?

Students can directly apply for an education loan. However, their parent(s) or guardian will be treated as co-applicants, and their role will be akin to a primary debtor (a person who owes money).

While the eligibility criteria for an education loan differ across banks, the basics are as follows:

  • Indian citizens and NRIs both can apply, but a valid passport is a must for the latter
  • The applicant and co-applicant(s) need to be over 18 years of age
  • You need to have secured certain marks during SSC, HSC, and graduation
  • Some banks even require the applicant to have cleared a certain national level entrance examination
  • The co-applicant, i.e. parent(s) or guardian, need to have a regular source of income
  • A confirmed admission from a recognised college/education institution (as per bank’s list) is a must

Documents required for education loan:

  • Income statements (Salary slip, Form 16, Income-Tax Returns of the last 2 years, and Computation of income of last 2 years certified by a Chartered Accountant)
  • Bank Statement/Pass Book of last 6 months
  • Copy of the admission letter of the Institute along with the ‘fee schedule’
  • Mark sheets and/or pass certificates of SSC, HSC, Degree Courses, National level entrance test
  • Age proof (birth certificate, passport, Aadhaar, PAN card, driving license)
  • Address proof (Aadhaar, passport, latest electricity bill, latest telephone bill, ration card, existing house lease agreement, bank account statement)
  • Photo identification proofs (Aadhaar, voter id, PAN card, passport, driving license)
  • Passport size photos of the applicant and co-applicants
  • Guarantor form (optional)

Usually, education loans below Rs 4.0 lakh do not require a guarantor; it depends on a case-to-case basis. However, the bank may insist on a collateral security like an insurance policy or a tangible collateral security (in the form of gold, fixed deposits, shares, real estate etc.).

An education loan amount ranging between Rs 4.0 lakh and Rs 7.5 lakh, apart from co-applicant(s), requires a third-party guarantee from a person who is not a blood-relation (an acquaintance, friend, or any other relative). This adds a further layer of security for the bank in case the co-applicant(s) / second-person guarantee fail/s to repay. For education loans above Rs 7.5 lakh, banks insist on tangible collateral security of a suitable value.

After a thorough due diligence, the bank sanctions the education loan. Once the loan is sanctioned, before disbursement, the loan agreement copy(which includes Demand Promissory Note, DP Note Delivery-cum-Waiver Letter, Standing Instruction Request, PDC (Post-dated Cheque) Cover letter, Affidavit, Deed Of Guarantee, Indemnity Bond, Disbursement Request Form) needs to be duly signed by the borrower, co-applicant(s), and guarantors. The disbursements can be done in full or in suitable instalments as per your requirements/fee schedule. 

In the entire process, if co-applicant/s (parents or guardian) have a good credit history, expect faster loan disbursal. Plus, the best interest rate can be obtained and/or even reduction or waiver of certain charges levied. 

For the economically weaker sections of the society, the Government of India offers an Interest Subsidy Scheme from. The scheme provides a subsidy on the full interest during the moratorium period, i.e. Course Period, plus one year or six months after getting job, whichever is earlier. The scheme can be availed of if the annual parental income from all sources is upto and inclusive of Rs 4.5 lakh. Moreover, the scheme is available only for studies in India, and for education loans upto and inclusive of Rs 10 lakh.

Further, PersonalFN’s EMI calculator can help you to estimate the monthly instalment payable. All you have to do is input the relevant data in the required fields and the calculator generates result in split seconds.

(Read our article on : How to go about planning your child's education)

What are the factors to look at?

  1. List of eligible institutes

    When you approach a bank for an education loan, first check if the university/institute is accredited by the Ministry of HRD and administered by the Ministry of Tourism. Moreover, is the university/institute eligible for Central Government’s Interest Subsidy Scheme. 
  2. Interest rate

    The interest rate determines your EMI and has a bearing on your budget and long-term financial wellbeing. So, make sure you’re availing a loan with a competitive rate of interest. It makes sense to compare interest rates across lenders.  
  3. The charges levied  

    Most banks, do not levy a processing fee for an education loan. However, you need to keep an eye on other charges such as prepayment charges, late payment charges, penal interest, and so on.

    Please note, some banks do not penalise you for prepayments; but for late payments interest @2% per month (i.e. 24% p.a.) is levied on overdue instalments. Further for a PDC bounce, Rs 500 plus applicable GST (Goods & Service Tax), per instance.        

    Hence, ensure your interest payments are paid on time, and if possible prepay your loan.
  4. Loan Tenure

    The maximum tenure for an education loan is usually 5-7 years (including moratorium period). However, as per the guidelines the loan tenure can be extended up to 10 years for loans up to Rs 7.5 lakh, and 15 years for a loan amount above Rs 7.5 lakh.  Remember, a higher tenure can reduce the your EMIs, making repayments comfortable; while opting for a lower tenure increases your EMI.
  5. Customer service

    Ensure the customer service at the lender has high standards. This service can even help keep track of your loan and be in better control of your personal finances.

    Remember, while lenders may have varying customer service standards, there are some basics of good service that are universal. The customer service among a few banks is transparent and well-co-ordinated and they respect the relationship with their clients.
  6. Terms & conditions

    Take the time to read the terms & condition carefully, so that you make an informed choice. This will avoid issues later and ensure a pleasant, hassle-free experience.

Benifits of education loan:

  • Existing finances are not exhausted and the loan can be worked out to suit your budget, facilitating you to save.
  • Existing investments assigned for other important financial goals such children’s marriage needs, your own retirement, etc. remain safeguarded.
  • Tax benefit: The interest you pay on the education loan is applicable for a deduction under Section 80E of the Income-Tax Act, 1961, provided the loan is taken for higher education in India or abroad. The deduction is available for vocational as well as regular courses. To claim the deduction, ensure you obtain the interest certificate from the bank/ lending institution. While there isn’t a ceiling, the total interest paid can be deducted for a maximum of 8 years or till the interest is paid, whichever is earlier. Basically, the deduction is available from the year you start paying the interest on the loan, and the seven subsequent financial years or until the interest is paid in full, whichever is earlier. It is vital to note that a deduction can be claimed only if the loan has been taken from a bank, approved financial institution, or an approved charitable institution.

Remember, education is a long-term personal investment which can truly transform and empower individuals.

So, do consider an education loan; it can be efficient way to finance your or your children’s education.

Add Comments

Oct 15, 2019

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Oct 17, 2019

Hi, Content is great. Education loan mainly helps to all those who are not able to complete their education due to financial problems. [url]https://www.antworksmoney.com/blog/category/education-loan/[/url]

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