Q1. What is an Education Loan?
Education loans are offered by banks to students to enable them to pay for higher studies such as graduation and post graduation courses, both in India and overseas. Apart from the tuition fees, other aspects of expenses such as hostel charges, equipment purchases and other course related expenses may also be covered by the education loan. In case of overseas studies, many education loan providers include the price of a return ticket into the education loan corpus.
As most students have no previous credit history, the parent or guardian has to co-sign for an education loan as a guarantor. Moreover, education loans also require key lender approved collateral such as property documents, fixed deposits, etc. Though there is an interest free (moratorium period) for an education loan, if you service the interest accrued on an education loan during the period, you may receive a further discount on the education loan.
Q2. Who is eligible for an education loan?
Every bank has its own eligibility criteria for dispensing education loans, but a few common parameters are:
- Applicant should be an Indian national.
- Applicant should have confirmed admission in a college/educational institution at the time the loan application is made.
- Applicant should be in the age bracket 16–35 years.
- The Applicant should have a co-borrower such as a parent who acts as guarantor for the loan
- Collateral in the form of a fixed deposit etc. is required for loan amounts higher than Rs. 4 lakhs.
Q3. What documents does the lending bank ask for?
Documents that are to be submitted with the education loan application include:
- Admission confirmation letters and papers validating any scholarships the applicant has qualified for.
- Schedule of expenses for the course including tuition fees and other expenses.
- Score sheet of qualifying test(s).
- Copies of foreign exchange permit/student visa for overseas studies.
- Bank account statements for last 6 months. (Can be a joint account with parent/guardian)
- Statement of assets and liabilities of borrower.
- Proof of age
- Proof of residence
- 2 passport size photographs
- Documents related to collateral required for education loans exceeding Rs. 4 lakhs.
Q4. What are the courses for which an education loan can be availed?
Education loan can be availed for all courses recognized by the UGC in case of India and all regular courses abroad. Each lender has its own list of educational institutions and courses that they would provide a loan for whether overseas or within India.
Q5. What are the expenses covered by education loans?
Education loans can be used for paying:
- Tuition fees and hostel expenses
- Exam, library, and lab fees if applicable
- Any refundable caution deposits paid to the educational institute
- Cost of books, uniforms, and other essentials for completion of course
- Travel expenses (return fare for international flights.
Q6. Is a co-applicant for education loan needed?
Yes, for all full-time courses a co applicant is required. The co-applicant can be Parent/Guardian or Spouse (if-married).
Q7. Who can be my co-borrowers?
Your parents/ guardian can be a co-borrower as well as spouse in case of a married applicant. The co-borrower should have a steady source of income and a good credit history in order to improve the applicant’s chances of a successful loan application.
Q8. Is there a maximum limit on an education loan that a lender can disburse?
Most lenders have a maximum limit of Rs 10 lakhs to Rs 15 lakhs for studies within India, while the maximum limit on education loans for overseas studies is between Rs 20 lakhs to Rs30 lakhs. In case of some lenders, the applicant can get a higher loan amount sanctioned provided bank-accepted collateral is provided.
Q9. What is the tenure of an education loan?
The average tenure for an education loan is between 5-7 years in case of most lenders. However, some lenders can offer a longer tenure of up to 15 years in case of higher loan amounts.
Q10. What is the maximum loan amount one can get for overseas studies?
Banks generally fund up to 90% of the education expenses as loan and some even provide loans for 100% of education expense. However, the exact loan amount an applicant is eligible for depends on a range of factors including the monthly earning of the parent/legal guardian, the value of collateral provided, the academic record of the applicant and other factors.
Q11. Is there a margin on education loans?
Most education loan providers do not charge a margin on education loans equal to or less than Rs. 4 lakhs. For higher loan amounts of up to 7.5 lakhs, banks and NBFCs have a margin of around 5% i.e. they provide loan amount equal to 95% of the course cost and the rest must be borne by the applicant. In case of higher loan amounts, the lender may decide to set margins on a case by case basis according to internal policies.
Q12. Does an education loan require security or collateral?
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 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 LIC/NSC/KVP, Fixed Deposit held with the lender, property documents owned by the applicant or co-signor.
Q13. Is the loan disbursed in favour of the borrower or the institute/college/university?
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.
Q14. What is employment verification in an education loan?
Some banks perform independent verification of the employment records of the loan cosigner, which typically include parent/guardian or spouse (if married) of the student who is applying for the education loan. In case the details provided cannot be verified, the loan application may be rejected by the prospective lender.
Q15. What is a holiday/interest free/moratorium period? What if there is a break in the study?
Each student is given some time by the bank before the repayment tenure starts. This is the time granted by the lender before the repayment begins is referred to as the holiday period. It is usually either 6 months to 1 year after the successful completion of the course, or the time it takes the borrower to start working at a job, whichever is earlier.
If there is a break in the course or the borrower chooses a sabbatical, it is entirely up to lending bank’s discretion on whether to add a few months to the holiday period.
Q16. Do education loans have any Income Tax benefits?
Loan borrowers can avail tax benefits on interest paid on education loan under Sec 80E of the Income Tax Act. This benefit is available over and above the Rs. 150,000 deduction allowed under Section 80C. Tax benefits can be availed once the borrower starts paying the interest on the education loan. Further, the deduction is available until the borrower pays off the full interest amount on the loan or for a maximum period of 8 years, whichever is earlier.
Q17. Is there a prepayment penalty on education loan?
Most banks do not levy prepayment penalty on education loan. However, it is best to check with the bank before signing the dotted line.
Q18. Is it necessary to have an account with the bank to avail of an educational loan?
Earlier, having an account in the bank from where the borrower was hoping to get a loan used to be an important criterion. Now it is no longer a mandatory requirement. If you have an account with the particular bank, it usually becomes easier to get the loan sanctioned. This is because of your prior relationship with the bank, your past financial records and transactions can be analysed faster to make a decision.
Q19. Can a student avail another loan for further studies? When will the repayment of the new loan commence?
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. This loan can be taken as a top-up loan against the already existing loan; however, it is subject to the lending bank’s discretion and the internal rules and regulations of the lender.
It will commence as per the new holiday period, which will take effect once the student has joined a new course.
Q20. Do banks offer an education loan in foreign exchange? I need to pay in dollars for my studies, but the bank is in India.
The loan availed by the student is paid to the educational institution directly in the local currency (Dollar/Pounds/Euro etc.). The lender may charge an additional currency conversion fee as per RBI regulations on the loan amount disbursed.
Q21. Is any incentive available for a girl student applying for education loan?
Banks generally provide a 0.5% concession on the applicable education loan interest rate to girl students pursuing higher education in India and abroad.
Q22. Are there any special privileges for students in the Scheduled Caste/Scheduled Tribe (SC/ST) category who avail education loans?
Yes, eligibility criteria and loan margins on education loan are relaxed for Scheduled Caste/Scheduled Tribe students availing education loans in India. The eligibility criteria are lowered from first/second class to pass class for SC/ST category students seeking education loan for graduate and post graduate studies, while, margin money is sometimes lowered than the regular percentage or nil.
Q23. Do banks consider education loan requests from NRIs?
Requests received from NRIs can be considered if:
- Student is an Indian passport holder and meets all the eligibility requirements
- Documents such as security or any collateral which is enforceable in India can be handed over to the bank.
Q24. Why do banks require an insurance policy?
Banks usually prefer that students avail a life insurance policy equivalent to, or more than, the loan amount. The policy acts as a security feature and forms a part of the collateral. In case of the untimely demise of the borrower, the bank recovers the outstanding loan amount from the student’s life insurance policy and the remaining amount, if any, is paid out to the beneficiary of the policy.
Q25. Is credit score important in case of education loan?
A majority of students applying for an education loan do not have previous credit history such as other loans or credit cards. Thus, education loan specialized lenders have a specialized credit scoring model that scores education loan application based on the University, College and the Course of admission. They factor the academic background of the student as well as the credit history of the co-borrower into their decision.