BT Insight: The how's and why's of getting an education loan

It is that time of the year when students scramble to seek admission into top-notch universities and parents do their best to fund their education. More often than not, their savings don't suffice the entire college fee and end up taking the loan route. A lot of banks, non-banking finance companies and even fintech start-ups offer education loans at varied interest rates. To compare interest rates is indeed important when exploring loan options, but one must thoroughly dive into terms and conditions to evaluate the impact of commission, penalty on late payment, moratorium and tax benefits. One should also look into what government schemes and subsidies offer.

"The key to get the right education loan is an accurate estimate of your loan requirement, your loan eligibility and a thorough comparison of interest rates and other loan terms. Apart from interest rates, do a research on security/collateral requirements, the extent of the moratorium period and prepayment options. Another important aspect is to choose the right loan tenure to arrive at an EMI amount that you can expect to service comfortably based on your future earning potential," says Gaurav Gupta, Co-Founder & CEO, MyLoanCare.in.

Here is what all you must know about education loans.

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Interest rates

Banks provide education loans at the marginal cost of credit-based lending rate (MCLR). They add a spread of 2-6 per cent over and above the MCLR. The MCLR may help students evaluate expected interest rates offered by various banks. Suresh Surana, Founder, RSM Astute Consulting Group points out that interest rates depend on various factors such as loan amount, loan tenure, availability of collateral, credit-worthiness and reputation of educational institutions. It ranges between 8.25 per cent and 15.20 per cent depending on the bank from which loan is being availed and depending on schemes offered by a bank. Some banks offer 0.50-1 per cent concession on rates for girl students.

Loan amount and time-period

One must thoroughly look into the fee structure given in the prospectus to calculate the full amount needed to be paid in a given time period. Along with an annual fee, there could be a quarterly or semester-based fee. Besides, the loan tenure should take into account the time taken to complete the course and to get a job.

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Lumpsum or tranches

A student can get an education loan sanctioned only once to pursue the selected course, but banks may disburse the loan in tranches to help you pay off your quarterly and annual fees. "Whether to go for lumpsum loan or stagger it in tranches depends on the loan amount in question and the length of your education course," explains Aditya Kumar, Founder & CEO, Qbera.com. "Interest is usually lesser if you take out a loan as and when you need it, rather than going for a lumpsum amount," he says.

However, if you require credit for pursuing an additional course, you can apply for a second education loan. "In such a case, you need to convince the bank that your income after the completion of course will be enough to repay both loans. Banks typically cap the estimated EMI to 50 per cent of your income as the rest is assumed to be required to meet your other living expenses," Kumar of MyLoanCare.in adds.

Moratorium

Education loans are not to be repaid until the course is complete. In addition, after the completion of the course, banks provide a certain timeframe to students to find a job and start earning. This period is called moratorium. "Interest during this period is calculated but there is no requirement to make repayments as students, who are still studying, pay EMIs only after they start earning," says Surana. Moratorium generally ranges between six months to a year.

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Hidden charges

The language of terms and conditions in loan documents could be complex. There could be a possibility that loan representatives do not divulge all relevant information. Hence, it becomes important to go through finer aspects of terms thoroughly. "Clauses for all incidental charges such as processing fees, charges involved in pre-payments or late payment of EMIs etc must be read carefully as interest is not the only cost for availing loan," Surana cautions.

Collateral and margin money

Education loans for a short amount (up to Rs 4.5 lakh) do not require a collateral and only third-party guarantee may suffice. However, bigger loans require borrowers to provide a collateral. Studies abroad usually cost high and require collateral in most of cases.

Tax benefits

Tax benefits can be claimed only on the interest paid on education loans - for both domestic and foreign education - Under Section 80E of the Indian Income Tax Act, 1961. The amount of interest paid can be deducted from the total income under Section 80E. "There is no upper limit on the amount of interest deduction. However, this tax benefit is allowed only for maximum eight years. This may be an important aspect in deciding the loan tenure," points out Surana.

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Government schemes

Three government education loan schemes that students should know about:

a) Central Scheme of Interest Subsidy for Education Loan provides interest subsidy during the moratorium period to economically weaker sections whose annual parental income is up to Rs 4.5 lakh from all sources.

b) Padho Pardesh Scheme of Interest Subsidy for Education Loans aims to provide interest subsidy to economically weaker sections of notified minorities during the moratorium period. Family income limit: Rs 6 lakh per annum.

c) Dr. Ambedkar Central Sector Scheme of Interest Subsidy for Education Loans aims to provide interest subsidy for overseas studies for Other Backward Class (OBC) and Economically Backward Classes (EBC). Family income limit: Rs 3 lakh per annum for OBC and Rs 1 lakh per annum for EBC.

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The above schemes are applicable for recognised technical and professional courses only. Banks also have their own customised schemes granting interest rate concessions depending on the gender of the borrower and family income etc.

Besides, to facilitate ease in availing of loan, the government has introduced Vidyalakshmi Education Loan Portal (www.vidyalakshmi.co.in). It is maintained by NSDL in collaboration with the Department of Financial Services, Department of Higher Education and Indian Banks Association. Students can view, apply and track education loan applications anywhere and anytime on the portal.

Current scenario

Banks follow a strict criterion for sanctioning education loans as default ratio remains high due to the nature of loans being unsecured and based on future repayment capacity of the students, which can be uncertain in the current employment scenario. Banks prefer offering loans for courses such as medicine, engineering and management. Professional courses such as CA and CS are also acceptable. Securing admission through an entrance test or on a merit-based scoring system makes the loan sanctioning easier. Lenders also require student to have a guarantor with a stable and regular income proofs.

"The idea is to assess the applicant's chances of securing a well-paying job to repay the education loan," says Kumar of MyLoanCare.in.