Questions and solutions to education loan application issues to help Indian students

Students applying for an education loan have many questions regarding the loan, the procedures, interest, eligibility, the quantum of loan, the period of the loan and a whole lot of other significant questions. I attempt to answer education loan-related questions that I struggled to get answers for when I was looking for a loan product. Hope this article helps you.

This is in continuation to my previous article on FAQs on education loan. Here are answers to a consolidated set of questions that crossed my mind, when we were applying for a loan to fund our daughter's higher studies.

Who can be a co-applicant/co-borrower?

The student is named as the main applicant in the education loan form. The parents are the first choice of co-borrower/co-applicant for applicants who are single. They can also have a legal guardian stand in as a co-applicant/co-borrower. In case an applicant is married, then the spouse or the in-laws can be a co-applicant/co-borrower.

It is mandatory that the co-applicant/co-borrower has an acceptable credit history and a regular source of income. The same has to be corroborated through pay-slip/IT Returns/Form 16

Is there a maximum limit caveat set on education loan?

Most financial institutions lend between ten lakhs and fifteen lakhs for studies in India. The amount for studies abroad is set between twenty and thirty lakhs. A few lenders sanction higher loan amounts for courses that cost more as long as suitable collateral of the value of the loan is provided.

What is the tenure for the repayment of education loan?

Most financial institutions have a tenure of five to seven years for repayment of education loan. Though there are some banks that extend the period for up to fifteen years if the loan amount is high.

How much loan is granted for studies abroad?

Most banks will finance up to 90% of the expenses through education loan. A few provide loans that cover 100% of the expense. However, the loan amount that gets sanctioned depends on many factors. Banks take into account the monthly income of the co-applicant to gauge their loan repayment capacity, and the value of the collateral, besides the academic record of the student, and other factors.

What is the margin amount on education loan?

The margin is applicable for education loan amounts exceeding four lakhs. For loans amounts between four lakhs and seven and a half lakhs, most NBFCs and bank ask for 5% margin money. Higher loan amounts can have a higher margin money policy. This can vary between lenders.

Margin money is the sum that that the applicant/borrower funds towards the education. This means that a financial institution will not provide 100% loan, but provide a loan to cover 95% of the cost of the course and other allied expenses. The balance 5% or any other amount decided by the lender will have to be funded by the applicant/borrower.

Is security/collateral mandatory for obtaining an education loan?

The security/collateral policies differ between financial institutions, and there is no fixed rule, as such.
  • However, most banks and NBFCs do not ask for third party guarantor or collateral for loan amounts lower than four lakhs
  • A third party guarantee is asked for when the loan amount is between four lakhs and seven and a half lakhs
  • Collateral is mandatory for loans above seven and a half lakhs

The following financial and other instruments are accepted as collateral –
  • FDs held with the bank
  • Property documents owned by the applicant/co-applicant (apartment/residential flat/land, but no agricultural land)
  • LIC/KVP/NSC in the name of the applicant/co-applicant

How is the loan amount disbursed?

The course fee and hostel fee are disbursed directly, by the bank, to the educational institution, according to the schedule presented by the latter. The other constituents of the loan like the travel expenses and expenses for books, laboratory apparatus and laptop etcetera are reimbursed to the applicant.

What is employment verification and why is it required?

A few banks carry out independent employment verification of the co-applicant (parent/guardian/spouse) to authenticate their employment claim. This is a precautionary measure to ensure that no fraud is taking place and that the documents presented are genuine. In an event where the furnished details cannot be corroborated then the lending institution can turn down the application.

Moratorium period/holiday period/interest free – what do these terms mean?

Most financial institutions provide the borrower sometime before starting the loan repayment schedule. This gap period when no repayment is expected is called the moratorium period/holiday period/interest-free. This period usually lasts between six months and one year. That is six months after you become employed or one year after completion of studies.

Is there any Income Tax benefits?

The Income Tax Act, 1961 allows the borrower tax benefits under Section 80E, on the interest paid on the education loan. This benefit is in addition to the deduction allowed under Section 80C. The borrower can avail of the tax benefit during the period the loan is being repaid. The benefit is not allowed during the moratorium period. The benefit can be enjoyed till the time the borrower repays the interest amount up to a period of eight years, and no longer.

Do banks charge prepayment penalty on the loan?

Banks usually do not charge a prepayment penalty on loans disbursed for education. However, it is in your interest to confirm the same with the bank prior to accepting the loan.

Does the borrower need to a customer of the bank to apply for loan?

Banks do not insist for the borrower to be a customer of their bank. However, having an account with the bank that you're applying for an education loan from makes the process a little easier. The bank can access your financial health and scrutinise it with ease.

Is it possible to take two parallel study loans?

Banks do sanction education loans for two different study programmes. An applicant can apply for a loan for an UG course and on its completion take a loan for a PG course, without first paying off the first loan. Such loans are given as a 'top-up' loan on the existing loan. However, such loans are not the norm and hinge on the discretion of the bank and the policies of the bank.

When does the repayment of the fresh loan start?

The repayment of the fresh loan will have a fresh moratorium period and the repayment will take effect once that ends, as per the new course.

Which currency is the education loan offered in when the educational institution is located abroad?

Students proceeding overseas to foreign universities need not worry about the currency, forex or exchange rate. The lending institution pays the educational institution directly in the applicable currency - pounds for the UK, dollars for the US, Euro for Europe etcetera. The lending bank does the conversion as per rules laid down by the Reserve Bank of India (RBI), at a nominal fee.

Do students belonging to SC/ST category enjoy special benefits?

The margin money on education loan is relaxed or made nil (varies from bank to bank) for students belonging to SC/ST category. For students seeking a loan for UG and PG courses, the eligibility criterion for the academic record is lowered to 'qualified', instead of qualified with first/second class.

Can NRIs apply for education loan in India?

Requests for education loan from NRIs is entertained only under the following circumstances –

  • The student must have an Indian passport
  • To qualify for the loan the student must meet all the eligibility requirements set by the lending institution
  • All other rules regarding collateral, security, co-applicant and moratorium will apply

Why do banks insist on a life insurance policy?

Banks have made life cover for the applicant mandatory. The policy is generally equal to the loan amount. The life cover acts is a security feature for the bank, as it can recover the loan amount in case of a mishap leading to the untimely death of the applicant. The insurance policy has the bank the main beneficiary. This allows the bank to recover its money and any extra amount received from the cover is paid to the co-applicant.

What is the significance of credit score for taking a student loan?

Most students applying for an education loan do not have a credit history. In such cases, the loan lenders use an internal credit score mechanism where they check the credit history of the co-applicant while factoring the academic record of the student and the course and institution that the latter has secured admission in. They create a credit score based on these factors.

There is some more information in the links mentioned below that can be of help to you -

Article by Juana
Juana is a freelance writer, with years of experience, creating content for varied online portals. She holds a degree in English Literature and has worked as a teacher and as a soft skill trainer. An avid reader, she writes on a variety of topics ranging from health, travel, education and personality development.

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