Factors To Consider For Getting Education Loan

The high cost of education can be a source of worry for many parents, particularly when they are already on thin household budgets. To top it all, foreign education could be the last straw, as it can include travel expenses, health and travel insurance, administrative costs, and accommodation costs. However, one should not worry much as there are plenty of education loan options available in the market to bridge the gap.

An education loan is a loan that is applied by students to fund their education. These loans are provided by public sector banks, private sector banks, Non-Banking Financial Corporations (NBFCs) as well as fintech companies. The loans can be availed for both traditional and non-traditional courses depending on the type of lender. To help you, scout out the best deal, here are some of the factors you should consider before applying for an education loan. 

Loan eligibility

The loan eligibility of a student depends on various factors, such as the loan type and lender selected, the institute, the accreditation of the course, the future earning potential, and the student’s academic profile. 

“An applicant applying for a secured education loan should ensure that the value of the collateral is equal to or more than the loan amount required, with complete and original documents. In unsecured loans, a co-borrower with a good credit score and sufficient income is a must,” says Ankit Mehra, CEO and co-founder of GyanDhan. 

Credit Score

Experts say it is extremely vital to have a good credit score to get an education loan as it results in faster loan approval and gives you an opportunity to qualify for the best loan rates. “Instead of looking at demographics such as location, gender, family background, and other factors, lenders focus on your credit record to process your education loan application. A good credit score encourages a lender to grant the education loan, eliminating chances of bias. Just like any other loan category, it will empower you to negotiate the rate of interest from multiple lenders in the market. A credit score above 700 is considered good and provides the lenders with the comfort to take a decision,” says Subhrangshu Chattopadhyay, Director of Business Development, CRIF High Mark.

Students with a credit history applying for an education loan require a sound credit score. What happens if a student does not have a good credit score? Chattopadhyay adds, “However, for those without a credit history, and are financially reliant on their parents, loan applications will require a guarantor. In such a case, the student will have to jointly apply for the loan with their parent and the lender will assess their credit history, as well as the ability of the parent (co-applicant) to repay the loan.”

Loan amount coverage

Before applying for a loan figure out the final cost of education as it goes much beyond tuition fees and living expenses. Moreover, for abroad education, it can include travel expenses, health and travel insurance, administrative costs, and accommodation costs. 

“For domestic education, the final cost can include books, equipment, laptop, hostel fees, and other expenses. While there are lenders that cover the entire cost of education, some student loans from public banks come with margin money. In layman’s terms, it is a percentage of the study expenses that the applicant has to arrange. Carefully consider the loan amount you need to borrow, enquire about margin money, and compare different loan products before approaching lenders,” says Mehra. 

Interest rate

Students should go for the lowest interest rate possible as it will decide their financial debt for considerable years. Generally, public sector banks give the lowest rate compared to private banks and NBFCs. “The interest rate for student loans usually starts from 7.75 per cent and can go up to 14 per cent, depending on the type of lender, loan product, course, institute, past academic performance, the credit score of the student/co-applicant, and the security pledged,” says Mehra. 

Moreover, lenders charge processing fees on the loan application. While some lenders refund the fees on the first disbursement of the loan amount, there are others that charge 1 per cent to 2 per cent of the loan amount. Applicants should also enquire about penalties if they plan to prepay the loan. 

Currency exchange rate

The depreciating rupee has suddenly made foreign education more expensive. But whatever be your source of buying foreign currency it is important to compare and negotiate the rates. This is because by careful planning you can reduce the cost, considerably. The important point to note is one should always negotiate the exchange rates with the lender to get the best deal. 

“Some lenders tie-up with a private forex player, who might charge more than the market rate for the currency exchange. Since it will increase the cost of the loan, it is better to find a way around it or look for an alternative,” says Mehra. 

Moratorium period

Public banks offer a moratorium period, wherein the borrower is not required to pay any part of the loan. It is the course duration plus 12 months or 6 months after securing a job in most cases. “The period ensures that the student is not burdened with loan payments and can focus on their education. However, they should bear in mind that in the cases of private lenders where interest servicing is required, simple interest is charged from the first disbursement and will compound if not serviced during the study period. It is wise to plan and pay your interest during the moratorium period to avoid accumulating interest, says Mehra. Moreover, it is advisable to go for a shorter loan tenure as one can save a tidy sum on interest payments.

Tax benefits

Individuals applying for an education loan for themselves, their children, or their spouse get tax benefits under Section 80E of the Income Tax Act. The unlimited deduction is available on the interest component of the loan thereby reducing the cost of borrowing. 

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