Education Loan

What is education loan? Here's a guide

 

To apply for the loan, one must be an Indian citizen, having secured an admission into a college/university recognised by a competent authority in India or abroad. 

 

Quality education is a must for a complete and successful life. For many, it is equivalent to graduating from a top institution. The cost of education is, however, increasing rapidly. In fact, the cost of studying at reputed institutions is already quite high.

 

 

Keeping this in mind, parents, who want to provide their children with the best possible education, invest their money in mutual funds (MFs), fixed deposits (FDs), unit-linked insurance plans (ULIPs), etc., for the long term.

 

But despite all this, one may still encounter shortage of funds. An education loan, therefore, plays a vital role in such a scenario by helping to bridge the gap between the shortfall and the required amount.

 

According to studies, the cost of education is increasing at an average of 15% per annum. The tentative cost of an MBA is up from Rs 2.5 lakh to Rs 20 lakh in 15 years. So if a couple starts saving Rs 2,000 per month for 15 years, at an average rate of 12%, they will be able to save approximately Rs 9.5 lakh. 

What does an education loan cover?

It covers the basic course fee and other related expenses such as (college) accommodation, exam and other miscellaneous charges.

 

Who can apply for the loan?

A student is the main borrower. A parent, spouse or sibling can be the co-applicant.

 

Whom is the loan offered to?

It is offered to students who want to study in India or pursue higher education overseas. The maximum amount offered for studies in India and overseas are different and varies from one bank to another.

 

Types of courses covered under the loan

It can be taken for a full-time, part-time or vocational course and graduation or post graduation in the fields of engineering, management, medical, hotel management, architecture, etc.

 

Eligibility, documents required

To apply for the loan, one must be an Indian citizen, having secured an admission into a college/university recognised by a competent authority in India or abroad. The applicant must have completed his higher secondary level schooling.

 

Some banks offer the loan even before one has secured admission into the university.

 

As per the Reserve Bank of India (RBI) guidelines, there are no restrictions on the upper age limit, but some banks may have it.

 

The banks require additional documents such as admission letter of the institution, fee structure, Class X, XII and graduation (if applicable) marksheets. Also required are the income documents such as salary slips or income-tax returns (ITR) of the co-applicant.

 

Loan financing, collateral requirement

The banks can finance up to 100% of the loan depending on the amount. Currently, for loan up to Rs 4 lakh, there is no margin money required. For studies in India, 5% of the required money has to be financed by the applicant. On the other hand, for studies overseas, the required margin money increases to 15%.

 

The banks also ask for collateral for loans above Rs 7.5 lakh. Presently, the banks do not ask for any collateral or third-party guarantee for loan up to Rs 4 lakh. For loans above Rs 4 lakh up to Rs 7.5 lakh, a third-party guarantee is required. A collateral is asked for loan exceeding Rs 7.5 lakh.

 

Once the loan application is accepted, the banks disburse the amount directly to the college/university as per the given fees structure.

 

Interest rate

The banks uses the Marginal Cost of Funds based Lending Rate (MCLR), plus an additional spread to set an interest rate. Presently (in 2017), the additional spread is in the 1.35-3% range.