PURSUE YOUR DREAM OF HIGHER STUDIES with an education loan

As the cost of education soars both in India and abroad, many students are opting for education loans from banks and non-banking financial companies

By Sangeeta Sinha

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It is no more only people who can’t afford expensive higher education who are opting for education loan. Often parents make their children opt for education loan so that they learn the value of money. Apart from making students financially disciplined, education loan also help students build up good credit histories which can be of great assistance for future loans.

With the cost of higher education increasing every year it is only with the help of a loan that many are able to take up higher studies. Most of the professional courses have fees structure ranging between Rs5 lakh and Rs10 lakh, with private college fees going up to Rs50 lakh.

Hence the role of education loan becomes very important and relevant. Most of the leading banks in the country have education loan schemes and are willing to provide financial assistance so that you fulfill your dream of higher education.

ELIGIBILITY

To be eligible for an education loan the student must have secured admission to a course. The bank will however check the credibility of the college and the course and also whether the student will be able to secure a job after the course.

For any commercial lending, credit history is important and since a student borrower has no credit history he is taken as creditworthy. But a co-applicant is a must in case of such loan; a parent, siblings or even spouse can be a co-applicant.

Next a third-party guarantor will be needed depending on the loan amount. Different banks have different policies but for smaller amounts say less than Rs5 lakh, usually a guarantor is not needed but for higher amounts a third-party guarantor is needed. You may be asked for collateral for loans exceeding Rs7.5 lakh.

And lastly the credit history of co-applicant and the guarantor is also checked. Parents cannot be a guarantor; a guarantor has to be someone other than a parent with sound financial condition.

LOAN AMOUNT

The loan amount depends on a lot of factors and varies depending on the institution, location, course fees etc. As a general norm banks offer loans up to Rs 7.5 lakh for courses in Indian colleges and up to Rs 20 lakh for studies abroad.

But it could vary between different banks and also on the kind of course you plan to pursue; some banks offer higher loan amount. Some banks even offer Rs30 lakh without collateral for studies in IIM, IIT, AIIMS etc says a senior banker.

But Rs7.5 lakh without collateral is common to all, he adds. Some banks have come up with education loan for students pursuing full time regular courses in foreign colleges/ universities in select courses that may even go up to Rs 1.5 crore, says another expert from the field. Also remember that you will have to make a down payment ranging between 5-20 per cent of loan amount.

INTEREST

Now comes the most important part of an education loan and that is the interest charged. It is always a good idea to compare the interest charged by different banks before you zero in on any bank. Many banks even offer discounts for premier institutions and even to female students. Generally the interest rate ranges between 11.75 and 14.75 per cent; it also depends on the institution and loan amount.

Make sure you understand how the interest will be

charged; daily reducing balance or quarterly reducing balance? Interest is normally charged on daily reducing balance but it is better to clarify with the lender; daily reducing balance is better as you pay only for what you owe on a day today basis says an expert from the field. Though banks give repayment time they start charging interest immediately after giving the loan and how they charge interest will determine the amount of interest you pay. It is a good idea to start paying the interest portion of your loan immediately that is if your bank allows that.

Banks usually give the option to service interest during studies or capitalise it and repay the whole amount later. But in case you go for capitalisation you will end up paying more as capitalisation would mean you end up paying interest on interest and that too at a higher rate of interest, explains an expert from the field.

REPAYMENT

Waiver period is important in education loans. Students get prolonged payment period. Check out whether this option is there with your loan provider and also how much time you will have before you start paying back your loan.

Generally banks don’t expect you to pay your loan till you get employed. Normally, repayment period starts one year after completion of the course. You may choose repayment period up to 10 years after study.

And lastly, there is a possibility that the student may not be able to secure a job soon and in that case parents should always have a plan B ready to start repaying the loan.

DEFAULTERS

Defaults in education loans affect the credit histories of both the borrower and the co-borrower. Try not to default on your payments. It is in fact a great opportunity for students to build good credit ratings; it will later help them to get easy home or car loans. Since the repayment does not start immediately you can use the extra time to plan and build your corpus.

Sometimes a student is unable to find a job immediately; in that scenario some banks do offer loan deferment but that is difficult. Some banks also offer extension if the student is unable to complete the course on time due to unavoidable circumstances.

Students may represent their cases and have the repayment schedule adjusted in case of delay in getting job subject to maximum repayment tenure prescribed by the bank, explains an expert.

Try not to default because if you default penal rate of interest would apply which is usually 2 per cent higher than the normal rate and some employers may not even offer employment to defaulters.

Sometimes you may have genuine reason but many conveniently forget the education loan. Never become a willful defaulter. Whatever the circumstances try to pay off your loan and build a healthy credit profile.

Non-banking finance companies

Though education loans are largely being offered by public sector banks (PSBs), you can also approach non-banking finance companies (NBFC) for your education loan especially if you want loan for some off-beat courses like art, music or say photography.

Banks generally are reluctant to offer loan for such courses because they will always want to know your job prospects after you complete the course. Banks and NBFCs have their own rules and both have advantages and disadvantages.

Generally NBFCs are more flexible compared to banks and they may even offer you higher loan amount compared to banks. Some NBFCs even offer visa or counseling services for students going abroad. But other conditions are generally similar for both like collaterals are required by both.

PSBs have an edge because of their wide network which is easily accessible to the common man as most banks have branches in remote and small towns and villages. Private banks have entered the market but they have lesser presence in small cities.

NBFCs may provide better service but they may have higher interest rates and may not provide discounts like banks do. It is recommended to check all the aspects before taking a decision.

Interest servicing – good practice

No one wants to pay more than the principal amount of loan taken. Interest payment always seems a burden. It is always a good practice to opt for regularly paying the monthly interest amount should the situation permit and start paying the EMIs when the repayment starts.

Loan amount (Principal + Interest) becomes large if no amount (i.e not even the monthly interest) is paid during the course period. However, it would depend on the financial status of the student/ parents.