Due to the rising costs of education, more and more parents are turning to education loans to fund their children’s academic dreams. Among parents, the term ‘education loan’ is frequently heard, and it is one of the few ways to cover a wide range of education-related costs.
However, it is essential to know the drill before applying for one. Here are the five things you should know before you apply for an education loan:
Check your eligibility for the loan
Before applying for an education loan, check whether you are eligible for the process. It’s easy to apply for an education loan if you are an Indian citizen who has secured admission to a higher education course from a recognised institution in India or abroad. To secure an education loan, the bank will ask you to submit an admission letter as proof of your confirmed admission to the said institute/college.
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When applying for an education loan, lenders may require a co-applicant such as a parent or sibling. They may also ask for proof of income to ensure the borrower’s ability to repay. It’s important to note that eligibility requirements can differ among banks, so it’s best to confirm with the chosen lender before finalizing the loan.
Check for expenses covered by the loan
Education loans help cover expenses related to academics. It includes tuition fees, examination expenses, laboratory fees, travel expenses, and study materials, such as books, equipment, stationery, uniforms, etc. Some lenders also cover the borrower’s insurance premiums as part of the loan.
When choosing a loan, borrowers should not only be aware of the expenses covered but also those that are not covered. It is important to understand the terms and conditions of the loan, which can vary from lender to lender. Some lenders may limit the percentage of expenses covered by the loan amount, such as in the case of student loans where expenses should not exceed 20 percent of the total loan value. Being informed of all aspects of the loan can help borrowers be financially prepared.
Collateral and guarantor requirements
When students apply for education loans, lenders may ask for a co-applicant or guarantor. In some cases, lenders may also require collateral or a third-party guarantor to minimize their risk if the loan amount exceeds a certain limit. Education loans can be secured using collateral such as property, securities, or deposits. As a borrower, it is important to carefully review the loan terms and collateral requirements set by your lender.
Interest rates
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When you apply for a student loan, the interest rate is a crucial factor to consider since it affects your monthly EMI. It’s essential to compare interest rates from different lenders before taking out a loan. Typically, education loan interest rates can vary between 8 to 14 percent, depending on the lender, the course, and the institute you choose.
For instance, some lenders may offer lower interest rates to students who enroll in top institutes like IITs and IIMs. Additionally, concessional interest rates may be available to women applicants, those from reserved categories, and borrowers who start their loan repayments during the moratorium period.
(Disclaimer: Data compiled by BankBazaar.com as of Aug 25, 2023. The latest interest rates on education loans for all listed (BSE) public and private banks were considered for data compilation. Banks for which data is not available on their website were not considered. The top 10 Banks with the lowest interest rates are listed in ascending order on the basis of interest rate i.e. bank offering the lowest interest rate on an education loan (irrespective of loan amount and tenure) is placed at the top and highest at the bottom.)
Loan Moratorium
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A moratorium period is a period of time granted by a lender during which borrowers are not required to make loan repayments. For education loans, this grace period usually lasts for six months to one year after the course ends. The purpose of the moratorium is to give borrowers enough time to find a job before they start repaying their loans.
However, it’s important to note that interest will still accumulate during this period, so borrowers should be aware of this and plan accordingly. Loan tenure can also vary depending on the bank, with some lasting up to 15 years, including the moratorium period.
Therefore, it’s essential for borrowers to understand the terms of their moratorium period and start repaying their loan as soon as they are able to. Education loans also offer attractive tax benefits — borrowers can avail of tax deductions on the interest component of their loan under Section 80E of the Income Tax Act.
Borrowers must, however, be prudent and disciplined with their repayments to avoid future financial distress.