In an increasing interest rate scenario, pick the lender and the amount of loan wisely
Being a graduate isn’t enough anymore. Post-graduation is almost a necessity to assure a successful career these days. But a quality post-graduation education at renowned institutes comes at a cost, and invariably, one that can gobble your savings. Master’s in Business Administration or MBA at a top B-Schools may cost ₹15-25 lakh or may be a few lakhs more, while a Master’s in doctor, could be even higher. So, while you may think you’ve planned your master’s education well, or your parents are well prepared financially to handle it, the long-term investments in fixed deposits, mutual funds and so on may not be adequate. This is where education loans come into play. Here’s all you should know it.
Eligibility and loan coverage
Let’s begin with busting a myth. Education loan is not the cheapest and in fact, depending upon the nature of the lender, it could possibly be the most expensive form of loan as well. Planning for it in advance may help. The primary criteria to apply for an education loan is that the candidate or borrower must be an Indian resident aged 18-35 years. To apply for a loan, the borrower must have a confirmed admission in a recognised Indian educational institute for a post-graduation course. Generally, a co-applicant is mandatory while applying for an education loan as there should be a person who can repay the loan in case the borrower (or the student) is unable to repay the loan soon as its due. Usually, banks may insist for the candidate’s parents or guardian to be the co-applicant and his/her financial position will also be evaluated by the bank for disbursing the loan. Education loan generally covers tuition fees, accommodation charges, exam and library fees, books and equipment (laptop). But these can vary from bank to bank.
Whom to approach
Rate of interest in private banks is usually higher than PSU banks while NBFCs’ rate of interest is the highest. Collateral could be a property, bank FD or insurance. However, NBFCs come with the advantage of faster loan processing compared to banks.
That said, NBFCs don’t provide any subsidy while banks offer interest rate subsidy to the weaker section of society. Women borrowers can avail a concessional interest rate from banks, as is the case with most loans. In the pecking order of rate of interest, PSU banks score better than others, while in terms of convenience NBFCs offer speed and flexibility for the borrower.
There are multiple educational loans available based on courses and institutions. Rate of interest and the collateral requirement, among other things, are the primary factors while considering an education loan. For instance, apart from SBI’s Student Loan Scheme, there is one popular product called SBI Scholar Loan Scheme which is applicable for admission in premier institutes. Under SBI Student Loan Scheme, one can get an unsecured loan up to ₹7.5 lakh. Currently the effective interest rate for this scheme is 9.05 per cent but it is a floating rate product. Considering SBI Scholar Loan Scheme, the loan offering would differ as per the institution in which you have got admission. Around 150 Indian Institutes have been categorised under AA, A, B and C lists wherein AA would include IIMs, ISB and so on. Students getting admission in AA list Institutes can get unsecured loan up to ₹40 lakh while for A and B list institutes, it is up to ₹20 lakh and ₹7.5 lakh for C list. Rate of interest will depend on the institutes, but it shall be in the range of 7.25-8.55 per cent. We can clearly notice that students getting admission in premier institutions are in a better position. Hence, before availing education loan and finalising college for admission, one must research thoroughly on college based on the factors such as average salary, placement percentage, college rankings and so on, as it could play a major role on the success of your loan application, rate of interest and collateral requirement.
For education loans, the repayment trigger starts only after the borrower gets a job. Such a grace period is called moratorium. Generally, moratorium starts from the day the student starts his college course and ends by 1 year post completion of course or 6 months post getting the job, whichever is earlier. Though, any repayment is not made during moratorium period, the interest is accrued for that period which borrower will have to pay. The purpose of providing moratorium period is to give the student enough time to attain financial stability. Repayment period is generally up to 15 years However, unlike a home loan, prepaying an education loan is more advisable so that the borrower or student frees up his/her financial obligation and is ready to take on new expenses as one would encounter in life. This is more so in an increasing interest rate environment.
Other factors to consider
Banks usually sanction only 80 – 90 per cent of the loan value. The remaining should be from the borrower’s savings. Some NBFCs however covers 100 per cent of the cost. Secondly, choose the loan tenure carefully. Most borrowers opt for shorter duration loan. But these come with higher EMIs. Check whether such a repayment schedule is commensurate with the salary structures that students of the institution are usually offered. Banks are generally averse to modifying the repayment schedule once the loan is sanctioned. But in extreme cases, like one we saw during the pandemic, if an education loan should be restructured, it can affect the borrowers’ CIBIL score. Availing a loan subsequently may turn out to be a costly affair.