It is common knowledge that the prices of education are sky-rocketing. Premier institutes have a fee hike almost every year. In such a scenario it becomes hard for students to amass the required money to pay for their education.
Many a time, this results in students giving on up their dream courses and institutes or deserving students missing out on an excellent opportunity. This is the plight of many students.
If you are sailing in this same boat, there may be a way out for you. Education Loans come as an endowment for those students who are unable to collect the required funds for their college education.
Purpose of Student Loans
A student loan is issued to a student to finance their higher studies. It helps students to apply for their desired course and pursue their dream profession.
Student loans are different from other loans. These are specifically designed keeping in mind the needs of students that arise during their higher studies.
Education loans range from covering part of the cost to covering the entire cost of education. Parents and students can decide whichever suits their needs best.
Education loans not only cover the tuition fees but also other expenses that arise during the time of education like accommodation, travel, etc.
Additional fee charged by colleges like Examination Fee and Laboratory Fee is also provided by the student loan. Some colleges also demand a refundable deposit which is covered by the bank too.
Aside from this, if the borrower has an insurance policy, the premium for the same is covered under student loan and is paid by the bank.
Student Loans are better than personal loans prominently because of the fact that the interest rates on student loans are comparatively less. Students are also not expected to give any margin on loans up to 4 lakhs.
Different kinds of student loans are there today from which a student can choose. Banks provide partial and full loans for both undergraduate as well as post graduate courses. In addition, an upper age limit is not defined by banks for acquiring loans.
Depending upon the bank the eligibility criteria can differ. However, some of the basic requirements for applying for a student loan are:
- Must be an Indian Citizen
- Should have secured admission in a recognized institute
- Should have qualified their last qualifying exam
- Must have an appropriate credit score as deemed by banks (this may differ in various banks)
- An upper age limit is not decided by the Reserve Bank of India for Education Loans
Aside from these, the students should also fulfill the requirements laid down by the specific bank (if any).
Students loans are only issued in the name of students. Parent or guardian is not eligible to apply on the behalf of the student. However, they can be named as the co-applicant.
The maximum limit of loans for studies in India is approximately up to Rs. 25 lakhs and that for studies abroad is up to Rs. 75 lakhs.
Students can also apply for a second loan, also known as ‘top-up’ loan for pursuing another course after their initial course is done. The repayment policy in such a case is slightly different from the normal one.
How do students get the money?
The bank sanctions the loan in the branch which is the nearest to your residence during your studies. The payable fee is also given directly to the institute.
Similarly, any other expenses that may arise for purchasing of any relevant material are paid by the bank to the merchant. This helps students in reducing the burden of directly managing the money.
For any additional personal expenses, the bank also transfers money directly into the account of the student. Therefore, it is of utmost importance to provide the bank with accurate details of the admission.
The repayment of the loan typically begins after the Moratorium period. The Moratorium period consists of a year after the completion of the course or 6 months after the student gets a job, whichever of the two comes first.
In the previously mentioned time period, the borrower is not liable to start the repayment. However, it is very important to remember that during the Moratorium period too your interest gets collected and piled up.
In order to avoid the brunt of high interest later, you should aim to begin your repayment process as soon as you can manage. One helpful tip is to start the repayment during the college years by paying simple interest.
The loan is repaid through Equated Monthly Installments or better known as EMI. These EMIs are predetermined and paid to the bank on a fixed date each month. If you have a bank account with the same bank, the bank directly deducts the EMI amount from your account.
Tax Benefits on Student Loans
Student loans do come with some tax benefits. These can be availed by the borrower when the repayment process begins. The benefit is mentioned in Section 80(E).
According to this section, a borrower or their spouse can claim tax return for the interest that they pay on the student loan. However, it is important to note that the deduction is not applicable to the initial borrowed amount, i.e., the principal amount.
According to the updated guidelines issued by the Reserve Bank of India, from 2016 banks use the Marginal Cost of Lending Rate to determine interest rates while providing loans. The compounded interest rate is calculated on this basis and should be paid after the moratorium period.
Some of the common terms that you should know while applying for an education loan are given below:
1. Marginal Cost of funds based Lending Rate-
This refers to the rate of interest below which a bank is not allowed to give loans. This was introduced by RBI in 2016. The MCLR of different banks may be similar.
2. Interest Rate Spread
Interest Rate Spread refers to the amount that a bank charges on the loan. A bank works on interest rate spreads. For many banks, this is their main source of profit.
3. Moratorium Period
Moratorium period is the time during which the borrower is not expected to start repayment. This period is usually 6 months after joining a job or 12 months after the completion of the course. However, the interest keeps on getting accumulated during this period.
Comparison of Student Loans of Various Banks:
The compound rate of interest may differ in various types of loan. Here is a general breakdown of the compound interest rate:
Marginal Cost of funds based Lending Rate (MCLR) + Interest Rate Spread (IRS) = Effective Rate of Interest (E ROI)
Given below are details of banks from the three sectors and their breakdown for interest rates on student loans with reference to the above calculation.
1. Axis Bank:
- Up to Rs. 4 lakhs – 8.75% + 6.45% = 15.2%
- Up to Rs. 7 lakhs – 8.75% + 5.95% = 14.7%
- Above Rs. 7.5 lakhs – 8.75% + 4.95% = 13.7%
Axis Bank offers the following benefits to students applying for education loan:
- No margins on Education Loans
- Education loans available for a variety of courses
- Easy loan disbursal
- A guardian can apply for an education loan along with the student
2. State bank of India:
- Up to Rs. 7.5 lakhs – 8.45% + 2.00% = 10.45%
- Above Rs 7.5 lakhs – 8.45% + 2.25% = 10.70%
State Bank of India offers the following benefits to students applying for education loan:
- The bank offers 0.50 concession in interest for female students
- The bank also offers 0.50% concession for students availing of SBI Rinn Raksha or any other existing policy assigned in favor of the Bank. This is applicable on the loan of 7.5 lakhs and above.
3. Union Bank:
- Up to Rs. 4 lakhs – 8.60% + 3.15% = 11.75%
- Up to Rs. 7.5 lakhs – 8.60% + 2.90% = 11.50%
- Above Rs. 7.5 lakhs – 8.60% + 2.00% = 10.60%
Union Bank of India offers the following benefits to students applying for education loan:
- If interest is regularly serviced during the course and moratorium period, i.e. prior to the commencement of repayment, then the student is eligible for interest rebate.
- No processing charges
- 0.5% concession for girl students
The value of quality education is not lost on us. Students are becoming more aware and decisive about their future. They are ambitious and wish to achieve the best for themselves. Therefore, education loan provides the students with an opportunity to pursue their ambitions without lack of finances holding them back.