Keep these 7 factors in mind before availing an education loan

Gaurav Aggarwal

The rising cost of education today is one of the biggest hurdles facing the youth in India. Since lack of finances have become a hindrance to higher education opportunities, more and more students are seeing education loans as a viable option to fulfil their dreams. For those planning to apply for education loans, here are a few guidelines to follow:

Choose your institute wisely

Most banks have a list of accredited universities. They only provide loans for universities listed with them. These banks also have a list of blacklisted universities, for which your application would be rejected. If your institute is not on the list of bank’s pre-approved universities, you should look for banks and lending institutes that provide education loans based on the institute's reputation. Keep in mind that such banks take certain factors -rating, infrastructure, job-placement facilities, etc - into consideration while approving an education loan for a particular university.

For an education loan to study in India, one can apply in colleges or universities recognised by University Grants Commission (UGC), the government, All India Council for Technical Education (AICTE), Institute for Mediation and Conflict Resolution (IMCR), etc. For those looking to avail an education loan to study abroad, one should look at the universities' repute and standing.

What your education loan should cover?

While you choose an education loan, make sure that it not just covers basic course fee, but also includes other related expenses such as hostel fees, examination fee and other charges including cost of laptop, equipment and books. After calculating all expenses, determine the loan amount you would require.

Maximum funding for education loan

For availing higher education in India, one can avail an education loan up to Rs 75 lakh with a maximum repayment period of up to 15 years. For studying abroad, the same stands at Rs 1.5 crore and 15 years.

Determine the marginal amount

Marginal amount is the money one needs to pay. It usually varies from 5 percent to 15 percent depending on various factors such as location, subject, institute’s rating. Remember that bank would only pay 80-90 percent of the total required amount, while the rest has to be paid by you from your own funds. Based on the student’s academic background, some banks and financial institutions may also offer up to fund the entire cost.

Check interest and processing costs

Education loan interest rates usually range between 8.3 percent and 15 percent per year. Some banks also provide interest subvention if you pay the interests on time and offer an additional concession of 0.5 percent to woman applicants.

Apart from interest, banks also charge a processing fee, which is at times refundable, depending on the bank you are availing a loan from. Some lenders generally levy a processing fee between a percent to two percent of the entire loan amount, but for public and private banks, it is usually between Rs 5,000 to Rs 10,000. One might also have to pay some additional charges - service charges and administration fee - during the loan application process.

Moratorium period or repayment holiday

Moratorium period is the time period when you have availed a loan but do not have to start repaying. Plan ahead and pay interest during this period as interest gets accumulated on a simple interest basis during this period.

For instance, if one avails of an Rs 7 lakh education loan with a three-year moratorium and 11% interest, the accumulated interest during the moratorium period would work out to Rs 77,000 per year. Thus, the total interest for those three years would be Rs 2.31 lakh. The final equated monthly instalment (EMI) would be calculated after adding the accumulated interest on the loan amount, which means bigger EMIs. When you pay interest during the moratorium period, you prevent the loan from getting any bigger.

Collateral and co-applicants

You don’t have to pledge collateral if you require a loan up to Rs 4 lakh. However, banks may seek collateral if you require a loan over Rs 75 lakh. As far as a co-applicant or third-party guarantee is concerned, banks may/ may not ask you to arrange for one in case you require a loan less than Rs 4 lakh. But one will have to rope in a co-applicant if there is a need for a loan above Rs 4 lakh.

The writer is Associate Director- Unsecured Loans at paisabazaar.com