What is an Education Loan?

An Education Loan is a Financial Resource which helps the students for funding their education which may be hindered due to non availability of funds. By availing an Education loan, students can pursue education in their preferred university  and in their choice of country without any hassle.

Which types of Institutes are available for availing Education Loans?

There are several Banks (Nationalised, Pvt and Co-operative Banks), Non-Banking Financial Institutions (NBFC) and International Banks offering Education Loans. You may choose from any of them.

Benefits of an Education Loan

• Reduces immediate financial burden on the family as students can repay these loans after completion of their education and once they start earning.
• Offers competitive Interest Rates especially for students which makes it more attractive
• Repayment duration and Moratorium facility which provides time period before beginning the actual repayment thru EMI.
• Parents can claim benefit under Sec 80E of the Income Tax Act 1961, this means that the entire interest paid on Education Loan is exempt from Tax.
• While making international remittance through loan funds, the TCS applicable for transactions above Rs 7 lakh will only be 0.50% as against 5% if the remittance is done through own funds.

Key Terminologies

1. Applicant – An applicant is someone who applies for the loan usually the student. If the student is a minor then the parent will be the applicant
2. Co-applicant – A person who applies for the loan along with the student sharing the responsibility of repayment. This can be a parent/ sibling or blood relative as per the Bank’s lending policy.
3. Guarantor – A person who guarantees the repayment of the loan is a Guarantor.
4. Secured Loan – The loans which are backed by a security in the form of property or any other liquid asset (also known as collateral security) by the bank are secured loans
5. Unsecured Loans – These are loans which are not backed by any security.
6. Moratorium Period – A moratorium period is a period in which the borrower is exempted to pay the EMI (can be principal or interest based on the bank’s policy)
7. Repayment tenure – The duration of the loan is the repayment tenure
8. Interest Rate – The percentage of interest charged on the amount of loan per annum is the Interest Rate.
9. Processing Fee – The fees charged for processing the loan application and disbursing the loan is Processing Fee
10. Pre-payment Penalty – The charge levied by the lender for repaying the loan before the repayment tenure.

While Applying for a Loan

1. Borrow wisely – Borrow within your means without compromising financial goals. Monitor your loan-to-income ratio for a manageable amount
2. Ensure that the Bank/ Financial institution from whom you have taken the loan is in the approved list by the country or university abroad.
3. Check with the bank if you can be eligible for any Govt Subsidy
4. Choose the loan tenure wisely as it will impact you finances, most students opt for moratorium period which reduces the burden of immediate repayment.
5. Compare ROI and check if the interest rates are fixed or variable, Repayment Period and other terms and conditions of different banks before applying.
6. Incase your parents/ co-applicant have any collateral security to offer, then you may consider opting for Secured Loans as the ROI on secured loans is comparatively lower than Unsecured loans
7. Check what kind of expenses (tuition fee/ hostel accommodation/ air fares etc) are covered in the loan.
8. Check for any hidden charges that can be levied by the lender in the due course.
9. Consider applying to multiple lenders (2-3) at the same time which can also act as a back-up.
10. Some lenders offer loan repayment protection or insurance plans, which provide coverage in case of unforeseen circumstances such as the death or disability of the borrower or co-applicant.

Types of Education Loans

Secured Loans

Secured educational loans require collateral as security. Some common types of secured loans include:

Loan Against Property

Students or their parents can pledge property as collateral to secure an educational loan. The loan amount sanctioned is usually a percentage of the property’s value.

Loan Against FD or LIC

If a student or their family holds a fixed deposit with a bank, it can be used as collateral to obtain an educational loan. The loan amount may range from 70% to 90% of the fixed deposit value.

Life insurance policies with a surrender value can be used as collateral for an educational loan. The loan amount is typically a percentage of the policy’s surrender value.

Dollar vs Rupee Loans

INR Loans

• This is a loan that is borrowed and repaid in Indian rupees (INR). The interest rate and EMI are fixed in INR. However, it’s important to note that this type of loan comes with the risk of currency fluctuations. If the INR depreciates against the USD, it could increase the cost of repayment. Therefore, it’s important to carefully consider the potential risks before opting for this type of loan.

USD Loans

• When you borrow a loan in US dollars (USD) and repay it in the same currency, the interest rate and EMI remain fixed in USD. This type of loan protects you from the risk of currency fluctuations. If the INR appreciates against the USD, the cost of repayment decreases, saving you money.

Unsecured Loans

• Unsecured educational loans are collateral free education loans. However, they may have slightly higher interest rates compared to secured loans. Some common types of unsecured loans include:

Private Banks

• Private banks and financial institutions offer educational loans without collateral. These loans are granted based on the student’s academic record, admission to a recognized institution, and the co-applicant’s creditworthiness.

NBFC (Non-Banking Financial Company ) Loans

• NBFCs provide educational loans to students without the need for collateral. These loans often have slightly higher interest rates than government-backed schemes or bank loans.

Tips to Manage Education Loans

Effectively managing study abroad education loans can ensure a smooth repayment process and minimise financial stress:

• Create a detailed budget that includes all expenses, both during the study period and post-graduation. Stick to the budget to avoid unnecessary financial strain.
• Explore part-time job opportunities in the host country to supplement income and cover living expenses.
• Continuously search for scholarships and grants to reduce the loan amount and ease the financial burden.
• Consult with education loan counsellors who can provide valuable advice and assist in getting you an education loan.
• Borrow only the required amount and repay the loan diligently to avoid long-term financial implications.