The cost of higher education has been escalating day by day, and it is increasingly becoming difficult to fund higher education expenses yourself.
If you have been looking for funding your own higher education, or the education of your son or daughter, an education loan (also called a student loan or a study loan) might be a very good option for you.
What is an education / study loan?
An education loan is a loan specifically given to cover the cost of higher education for yourself or for your child. These loans are available for courses in India as well as in foreign countries.
The great part is, the loan covers not only the tuition fee, but also other costs associated with higher education, like hostel fees, cost of books, etc. The tuition fee is paid directly to the institute by the bank.
Education loans are mostly offered to students who have secured admission to graduate or post graduate degree courses in management, engineering or medical. In some cases, the loan would be given even if you have got admission in a reputed diploma course.
How much money is available through an education / study loan?
For a course in India, most bank offer a loan for up to Rs. 7.5 Lakhs.
For a course outside India, the loan amount can go up to Rs. 15 Lakhs. Some banks do offer even higher loans on a case by case basis.
What are the terms of repayment of an education / student loan?
Education loans have very lenient repayment terms. The repayment of the loan normally starts 12 months after the course completion or 6 months after you get employed – whichever is earlier.
This way, before you start repaying the loan, you get enough time to find a good job after the course is over. Repayment is done through Equated Monthly Installments (EMIs) and covers both principal repayment and interest payment.
Most banks provide you up to 7 years to repay the loan.
You need to pay simple interest on the loan amount from the date of loan disbursal till the actual EMIs starts. However, most banks also give you an option of a moratorium on this interest payment.
If you choose this option, you do not pay anything while you are studying – the interest gets accumulated and you repay everything through EMIs 12 months after the course completion or 6 months after you get employed – whichever is earlier.
What are the requirements for an education / study loan?
Documents
Although the list of documents would vary depending on the bank of your choice, the following is the list of documents that most banks ask for:
- Proof of identity
- Proof of address
- Proof of admission
- Schedule of expenses
- Photographs
- Marksheets
- Bank account statements
- Income tax returns
Guarantor
Most banks ask for a guarantor or joint borrower / co-borrower to grant an education loan. If you are taking a loan for yourself, your parents can be your guarantors.
The guarantor need to provide documents like proof of income, bank statements, income tax returns, etc.
Collateral
Most banks do not ask for collateral if the loan amount is Rs. 4 Lakhs or less. However, for loans over Rs. 4 Lakhs, banks usually as for some collateral equal to the value of the loan.
Most banks accept property, National Savings Certificate (NSC), gold, fixed deposits (FDs), life insurance policies, etc. as collateral.
Interest rates for education / student loans
The interest rates charged for education loans are quite attractive – they are much lower than the rates for personal loans. This, coupled with the income tax benefits offered by these student loans (please see below) make them very compelling for higher studies.
Some banks also offer you an option to choose between floating and fixed interest rates.
At the time of writing this article (January 2012), the prevailing interest rate on education loan is around 11.5% – 12% for a floating rate education loan.
The rate of interest is usually slightly higher if you opt for a moratorium period on the interest payment. The rate is lower if you start paying the interest as soon as the loan is disbursed.
Education loans – Banks’ tie ups with Educational Institutes
Some banks have tie ups or pre-negotiated arrangements with some educational institutes. In such cases, the paperwork is normally significantly less since the bank would have vetted the institute and the courses beforehand. The banks may also wave off collateral requirement in these cases.
Banks might have pre-approved list of specific courses from an institute as well.
Some of the institutes for which banks have special arrangements are:
- Indian Institute of Management (IIMs)
- Other reputed management institutes like Indian School of Business (ISB)
- Indian Institute of Technology (IITs)
- National Institute of Technology (NITs)
Income tax (IT) benefits of an education / study loan
An education loan provides lots of income tax benefits – for complete details, please read “Income Tax (IT) benefit of an education / study loan – Section 80E“.
Please note that the tax breaks provided by an education loan are over and above the tax benefits provided by Section 80C investments and the tax benefits of home loans.
Education / student loans – Other things to keep in mind
- Most banks do not levy a prepayment penalty on education loans. So if you are doing well in your job and are earning well, you can repay the loan faster.
- You can transfer an education loan from one bank to another. In this case, there might be a penal levy of 1% of the outstanding loan amount.
- If you leave your course midway, you would need to start the EMIs with immediate effect.
- Some banks may require you to have life insurance equal to the amount of the loan sanctioned.
Which banks offer education / study loans?
Almost all banks – both public sector and private – offer education loans. Here is an indicative list:
- Axis Bank
- Allahabad Bank
- Bank of India
- Bank of Baroda (BoB)
- Canara Bank
- Federal Bank
- IDBI Bank
- HDFC Bank
- ICICI Bank
- Punjab National Bank
- Syndicate Bank
- State Bank of India (SBI)
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