Education Loans are definitely a blessing for those students that require capital to pursue their education to get better opportunities. It opens new avenues for education, for instance these loans enable students to consider the option of studying overseas.
The rising tuition fee and living expenses overseas makes it necessary for most families to borrow money in order to provide quality education for their children. Domestically too, with more and more private institutions entering the education Industry, the cost of higher education looks to be on a rising trend for the short-medium term.
Education Loans comes under the Priority Sector Lending requirements for the Banking Sector. Despite this, all financial institutions including banks do their own due diligence before extending loans to individuals.
Just like other loans, Education Loans also have many variables at play that determine the rate interest and security required as collateral. Before extending an educational loan an institution will undertake the complete due diligence of the borrower that involves:
- Past academic record of the student
- Quality and Recognition of University or Institution for which the loan is required
- Job attainability (likelihood of getting a job after the completion of the course: this would depend on student ability, global job environment as well as the quality of the campus placement)
- Expected Salary after course completion (for calculating the amount of capital to be given as loan)
- Credit History of Borrower and co-applicants
All these factors play a major role in determining the amount of loan sanctioned as well as the rate at which it has been given. Ideally, the lender will like to extend the loan to a candidate that has consistent academic performance, a fair likelihood of getting a decent paying job as well as would want the institution/university to well recognized. It is important to note that not all the courses on offer are eligible for receiving loans. Neither are all institutions eligible for loans. Banks require government entities such as UGC, Ministry of Education etc. to recognize the institution.
Features of Education Loan
- For Banks, this loan is part of the Priority Sector lending requirements
- Education loans have a unique feature called Moratorium Period
- Collateral may be required if loan amount exceeds INR 4 Lacs
- Margin Money is required to contributed by the borrower
- Rates charged usually are lower than other loans
- Repayment will be subject to tax benefits
As mentioned above, Education loans are only extended to the candidates that have the highest likelihood of repayment. Or the lowest chance of a default. Various factors are looked into for this (as mentioned above). The rate of the educational loan is majorly affected by the global economic environment.
For instance many institutions had to stop extending education loans after the 2008 debacle. New job creation was on an all time low in countries abroad which meant either the moratorium period of the existing loans was extended or that there was long list of defaulters.
Moratorium Period is a rare feature also seen in educational loans. Moratorium Period refers to the period of the completion of the course. This is the period during which there is no need for repayment and after the completion of which the loan servicing has to begin. The loan has to be taken before the start of the education program to meet the fee requirements and since a student does not have a regular source of income, a grace period is awarded for the completion of the course.
Mostly, all types of education loans require the borrower to pay a minimum margin money payment. This Margin Money is in the range of 4-5% of the loan amount required for institutions within India. The same rises to around 15% of the loan amount for loans to institutions abroad. Certain aggressive lenders, have relaxed the norm of taking margin money for e.g. HDFC bank.
Another feature of Education Loans is the collateral that is required. Over a certain amount the lender would require collateral to be kept as security to reduce the risk exposure. The limit over which collateral is required is usually in the range of INR 4 Lacs. For loans below INR 4 Lacs no collateral is required. Usually for loans between INR 4 Lacs and 8 Lacs a third party guarantor of the loan is required (acting as collateral). And, for loans that are above the amount of INR 8 Lacs one needs to provide an asset as collateral.
Usually lenders in India lend up to INR 15 Lacs for institutions within India and up to INR 30 Lacs for overseas’ institutions.
Usually one will find education loans at 11-15 % p.a. interest.
Eligibility for Education Loan
The following are the eligibility criteria to qualify for a student’s loan:
- The minimum age usually for such a loan is 16 years and the maximum age is usually around 40 years.
- The student must be an Indian National and must have secured an admission for his/her higher education through a merit based selection process.
- Must have a credit worthy academic record and performances that increase the probability of getting a job after the course
- During the tenure of this loan the student should have undertaken another educational loan
- The student seeking the loan or the parent/guardian can avail such a loan
- Not all courses are financed through such a loan. The borrower must check with different lenders to see the variety of courses that are eligible.
- Certain lenders also have the requirement of Co-Applicant on such loans
Purpose of Education Loan
The lender lends money to the borrower under the condition that the money from the loan should be allocated to educational fee and other supporting activities. In general, the following are the different activities for which the loan is meant:
- College/University tuition fee
- Hostel Fee
- Examination/Laboratory/Library expenses
- Purchase of books/stationary/equipments etc.
- Travel expenses (to and fro) for studies abroad
- Purchase of computer
- Any other expenses for the completion of the course
Charges & Repayment of Education loan
Apart from the interest charged on the loan, no processing fee (some institutions charge a processing fee for the loans given to students going abroad), upfront fee or foreclosure charges are taken on this loan.
The term of the loan is generally for a period of 5-7 years. The servicing of the loan generally starts around 6 months after the completion of the course or 1 month after the student begins to earn, whichever is earlier. If for some reason, the student is unable to complete the course in the stipulated time, an extension will be provided till the completion of the course till the maximum of two years.
Documents Required for Education Loan
- Institute admission letter
- USA Applicant Form I-20; UK Applicant: Form CAS Letter
- SSC, HSC, Graduation mark sheet along with the mark sheet of the entrance/aptitude test taken for admission
- KYC Documents such as address and Identity proof, signature proof, Age proof,
- Document showing income of the borrower Salaried:
- Latest 3-6 salary slips carrying joining date details;
- Latest 6 months Banks statement;
- Last 1 year’s form 16 and income tax returns
- Documents for Self Employed:
- Last 3 years ITR
- Last 3 Years Audited Balance Sheet and P& L statement
- Last 6-10 months bank statement
- Proof of business, business location and official address proof
- Complete application form
- Latest attested photographs