How to get the right education loan

June 22 2014

But delay in repayment will affect credit history of student and co-borrower

"Neither a borrower nor a lender be," William Shakespeare had written in Hamlet. Trying to go by this today, however, seems an impossible task.
Whether it is for buying a house or a car or pursuing higher studies, loans are common today. With college fees increasing every year, many have no option but to opt for education loans. For undergraduate engineering courses, the fees could be Rs 5-10 lakh, while for a five-year medical course at a private college, this could go up to Rs 50 lakh. For post-graduate courses such as those on management, fees could be more than Rs 10 lakh.

Fees at private colleges are higher than in government colleges.


Co-applicant is a must; can be parents, spouse, siblings
For loans between Rs 4-7.5 lakh third-party guarantor is required
For loans above Rs  7.5 lakh lender will ask for collateral
Repayment starts six months to one year after completion of the course
Default in payment will affect credit history of student and co applicant
If student goes abroad, lender will recover from co-applicant, that is, parents
For abroad studies, loan alone might not suffice; look for part-time job or sponsorship
Insurance is compulsory for foreign courses

Ajay Bohora, Chief Executive Officer, Credila Financial Services, an HDFC Ltd company, says, "We have been noticing a surge in the number of student going abroad for undergraduate studies. Many students have started opting for the US for undergraduate studies," he says.

Banks offer loans of up to Rs 10 lakh for courses in Indian colleges and up to Rs 20 lakh for studies abroad, according to Indian Banks' Association norms. But for post-graduate courses in premier management colleges in India, such as the Indian Institutes of Management, banks offer loans of up to Rs 20 lakh. While the size of a loan depends on the course and the college, the ticket-size of student loans in India ranges between Rs 2 lakh and Rs 22 lakh, the average ticket size being about Rs 5 lakh, says Bohora.

These loans cover fees for tuition, examination, library, laboratory and hostel; money for purchasing books, equipment, instruments and uniform;  travel expenses for studies abroad; caution deposit or refundable deposit, etc. In some cases, there are limits on some of these items. The loan also pays for expenses on study tours and project work.

Conditions for sanctioning a loan

While sanctioning a loan, a lender will check if a student has actually secured admission to a course, the quality of the college and the course (whether it is recognised by the University Grants Commission or the All India Council for Technical Education), if the student has the ability to secure an appropriate job after the course and the credit history of the co-applicant or guarantor. In case the loan is backed by collateral such as property (in case of high-ticket loans), lenders also consider the value of the property.
Under education loans, fees for tuition, examinations, library, etc, are paid directly to colleges.

Co-borrowers and guarantors

All education loans must have a co-applicant, usually a parent. In some cases, a sibling or spouse suffices.

If the loan amount is less than 

Rs 4 lakh, for instance, loans for nursing courses, the lender doesn't seek a guarantor or security. For loans of Rs 4 to Rs 7.5 lakh, a third-party is guarantor is required, while for loans exceeding Rs 7.5 lakh, lenders insist on collateral, usually property. Defaults in education loans affect the credit histories of both the borrower and the co-borrower.

"The guarantor has to be someone other than the parent, with a sound financial condition. We insist on this because we are not sure of the student's ability to repay. There are cases of wilful default in which a student goes abroad after studies and does not repay the loan. In such cases, we recover the money from the parents. If there is collateral such as property that has been mortgaged, we can use Sarfaesi (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002," says a bank official.

Interest rates

Currently, interest on education loans is between 11.75 per cent and 14.75 per cent, depending on the loan amount and the college concerned. For premier institutions, lenders offer a discount of 25 basis points. Public sector banks  offer a discount of 25 basis points to female students, says the bank official.

Repayment terms

After the completion of the course, those taking education loans get a moratorium of six months to a year, before they start repaying. In the case of an engineering course, students get four years (the course duration), along with an additional year, to start repaying. The repayment has to start a year after the course is over, even if the student doesn't manage to secure a job. Once the repayment starts, the borrower can avail of benefits under Section 80-E of the Income-Tax Act.

Why should you take a loan?

While a loan might not be sufficient to meet the entire cost of an educational course, it could be a great help. "These days, many parents decide to let their children take education loans just to ensure they learn financial discipline. Parents tend to retain their savings for emergencies or unforeseen expenses," says Bohora.

Usually, it is the first loan a student avails of and, therefore, by repaying on time, students can build good credit histories; this will be of immense help when they seek to avail of automobile loans, home loans, credit cards, etc. "With timely  education loan  repayment histories, students have been building great credit scores for themselves. In many cases, they get pre-approved loans for other requirements, based on impressive credit scores," Bohora adds.

Overseas studies

In the case of studies abroad, students must consider additional sources of funding such as scholarships or part-time jobs, as the funds required are quite high says Suresh Sadagopan, founder, Ladder7 Financial Services. "Given a post-graduate course in a country such as the US could cost up to Rs 30 lakh, or more, per year, it is not possible for parents to fund a child's education on their own. And, dipping into their retirement savings for this purpose is not advisable. That is why in many cases, even if the student takes a loan, we advise them to look for a part-time job," he says.

If the tuition fees for a college in India are between Rs 50,000-Rs 2 lakh, the same outside India could be five to 10 times, says Vinayak Kamath, Director, Gee Bee Education. While undergraduate diplomas in some countries, like New Zealand and Canada, can be completed on bank loan, for graduate courses additional funds are a must.

Insurance, which is compulsory for foreign studies, is another added cost. The sum assured can vary between a minimum of $50,000 to $250,000 (Rs 30 lakh to Rs 1.5 crore).

"The sum assured will depend on the kind of college. Some colleges insist on a particular amount of insurance and some even insist that the student buys it from a local insurance company. That can be more expensive than buying a policy from an Indian insurance company," says M Ravichandran, president, insurance, Tata AIG General Insurance.

The premiums can vary from Rs 8,500 - 10,000 per year for students travelling to UK, Australia and from Rs 20,000-30,000 per year to those travelling to USA. Typically, the insurance covers study interruption, sponsor protection, compassionate visit apart from accident and sickness reimbursement and personal accident. "The policy also covers expenses if the student is hospitalised for drug abuse or for rehabilitation. We have seen incidents like this, since in most cases the students are going abroad for the first time,'' Ravichandran says.

There is always a risk the student may not get a job immediately after completing the course. So, parents have to be prepared for such a scenario, Sadagopan adds.