The past 10-15 years have seen a rise in costs of education as well as career aspirations of students keen to pursue higher studies from top institutes in India or even abroad. Before the education loan era, funding options for the middle class were mostly restricted to getting a scholarship or depending on your parents’ savings to see you through.
Of late, students are more willing to take responsibility for funding their studies. An education loan is a good option for such students, and a much better alternative to personal loans which have a prohibitive rate of interest.
While the cause is a noble one, it is like any other loan – remember that it is a risk for the bank and a debt, not a gift, and here are some aspects you need to think about before applying for an education loan.
Taking an Education Loan
Why are you taking an education loan?
Are you unable to afford the entire cost, or only part of it? Remember, the lesser loan you take, higher the chances of approval. At the same time, the loan instills financial discipline in and builds your credit history (if you have no prior loans or credit cards). Be clear about why you’re taking one.
What does an education loan typically cover?
- Tuition fees, exam and library fees
- Books and necessary equipment like a laptop
- Hostel fees / other accommodation charges
- Any other expenses needed to complete the course (on a case to case basis)
What is the eligibility criteria?
While exact criteria may vary across banks, the common ones are
- You should be an Indian resident, between 16-35 years of age
- A collateral security may be needed depending on loan amount
- Depending on your financial status, there should be a co-applicant
- The co-applicant could be anyone among parents, spouse, siblings, in-laws, uncles/aunts
What documents do you need to have?
Again, this differs from bank to bank, but you should have the following documents at hand:
- Copy of admission letter from the college with fee structure
- Mark sheets of SSC, HSC, graduation
- Grade sheets of any entrance exam like GRE/GMAT/TOFEL
- KYC documents (recent photo, proof of age, identity, residence, signature)
- Bank statement for the preceding six months
- Income documents (of self and/or co-applicant as applicable)
How much loan can I apply for?
- For education loan, most banks have upper limit of Rs.10 lakhs for education in India and Rs.20 lakhs for education abroad
- A few might have a limit beyond that or no limit at all, at the bank’s discretion
- Smaller amounts (upto Rs.4 lakhs) may be disbursed in full
- Usually a margin of 5% for studies in India and 15% for studies abroad, for amounts exceeding Rs.4 lakhs
- Depending on fee schedule and funds requirement, bank may either disburse the loan in full or in installments, directly to the college
Is collateral and/or guarantor required?
- Most banks allow unsecured loans of upto Rs.4 lakhs, some even allow upto Rs.7.5 lakhs
- Beyond that a guarantee and/or a tangible collateral security would be required
- Some banks might also require a parent and/or other guarantor to sign up as a co-applicant
What are the interest rates? Are there any other expenses?
- Interest rate ranges from 9% to 18% pa
- Processing charges could be between Nil to 1.5% of the loan amount
- There could be other charges / penalties which would be available on the bank’s website
When will I have to repay the loan?
- Repayment usually begins 12 months after the course ends or 6 months after you get a job, whichever is earlier
- The tenure of the education loan can be from 7 – 15 years after this period
- Remember: any default in payment affects not only your credit history but also that of the co-applicant
Are there any income tax benefits on taking an education loan?
- Deduction is allowed under Section 80E of the Income Tax Act, 1961
- Benefit is applicable only on interest component of the loan, not principal amount
- You must be an individual – this benefit is not available to HUFs
- The loan has to be taken from a notified financial institution or an approved charitable institution
- No deduction allowed on loans taken from friends, relatives, colleagues, employer etc
- Loan must be in your name, and towards education for yourself, spouse, children or anyone for whom you are the legal guardian
- Interest should be paid from your income which is chargeable to tax
- There is no limit to the amount of interest you can claim as a deduction
- This deduction is available to you for upto 8 years or till payment of interest in full, whichever is earlier
The HRD Ministry also has a Central Government Interest Subsidy Scheme for supporting students from economically weaker sections.
Hope this was useful – now go and get that degree 🙂