What is Margin Money in Education Loan?

When applying for an education loan, especially for studying abroad, one important term you'll come across is margin money. It refers to the portion of the total education cost that you or your family are expected to contribute, while the rest is covered by the loan. Understanding how margin money works is crucial, as it directly affects the amount of loan you can avail of and how you plan your finances.

In this article, we’ll learn what margin money is in an education loan, how it's calculated, and what role it plays in your overall funding strategy.

Understanding Margin Money in Education Loan

Margin money in an education loan is the amount of the overall education cost that the borrower (family or student) has to pay, whereas the lender finances the rest of the amount. In other words, it is the contribution of the student to the overall education cost. For instance, if the overall cost for a program is ₹20 lakh, and the lender provides 90% funding, the borrower must pay the remaining 10% (₹2 lakh) as margin money.

Now that you know what margin is in an education loan, let’s see its purpose and how it works further in the article.

Purpose of Margin Money in Education Loans

Margin money plays a vital role in education loans. Here’s why it matters:

• Shared Financial Responsibility: By making the students and their guardians contribute a part of the cost, it facilitates joint financial responsibility. This encourages responsible borrowing and may help minimise the possibility of defaults.
• Reduced Lending Risk: Lenders lower their exposure to finance by compelling the borrower to pay margin money. This reduces the lending risk; hence, the loan becomes less risky for the financial institution.
• Avoids Over-Borrowing: The margin size in education loans makes borrowers avoid depending wholly on borrowings, compelling them to invest their own money and manage finances better.

How Does Margin Money Work?

In general, education loan margin money must be arranged by the borrower before the lender releases the loan amount.

For example:

• If the tuition fee is ₹10 lakh and the lender provides 90% funding with a 10% margin money requirement, the borrower will have to pay ₹1 lakh in advance.
• The lender will then release the remaining ₹9 lakh to the educational institution directly.
• The same principle applies to the living costs or other related expenses funded by the loan.

Determinants Affecting Margin Money in Education Loans

The margin money requirement will differ based on several factors, such as:

1. Loan Amount:

   Larger loan amounts often have higher margin money requirements, while smaller loans may have lower or no margin money obligations.

2. Type of Course and Institution:

   Loans for reputed universities or government-recognised institutions may have lower margin money requirements. For less recognised institutions, a higher contribution may be required from the borrower.

3. Scholarships and Grants:

   If the student receives a scholarship or grant, it reduces the overall cost of education. As a result, the margin money requirement may decrease.

Tips for Effective Management of Margin Money

The following are some tips for effective management of margin money.

1. Financial Planning:

   Since margin money needs to be arranged by the borrower, it is important to plan finances. Students and their families should save accordingly to meet this requirement without financial stress.

2. Leverage Scholarships and Grants:

   Applying for scholarships can reduce the overall cost of education, thereby lowering the margin money requirement.

3. Consider Part-Time Work:

   In some countries, students are allowed to work part-time while studying. This can help cover the margin money contribution and reduce the financial burden.

4. Explore Loan Options Carefully:

   Compare education loans and opt for options that offer competitive interest rates and lower margin money requirements to reduce the upfront financial burden.

How is Margin Money Calculated?

Let’s understand how margin money works with a simple calculation.

The formula is:

Margin Money = Total Education Cost × (Margin Percentage ÷ 100)

For example, say your total education cost is ₹5,00,000, and the institution requires a 10% margin. Here’s how it’s calculated:

Margin Money = ₹5,00,000 × (10 ÷ 100) = ₹5,00,000 × 0.10 = ₹50,000

So, in this case, you would need to contribute ₹50,000 from your funds. The education loan would cover the remaining ₹4,50,000.

This margin amount varies depending on the loan provider and the type of course or country you're applying for, so it's important to check details beforehand.

Conclusion

Margin money is a component of education loans. Required by some lenders, it represents the portion of expenses that students and their families must contribute. Students need to understand what margin amount in an education loan is, and plan accordingly to get financial assistance.

If you're planning to study abroad, Credila offers student loans with up to 100% financing and no margin money requirement, making it easier to pursue your academic goals without financial stress.

Disclaimer:

As of March 31, 2024. T&C apply.

Credila Financial Services Limited (Formerly known as HDFC Credila Financial Services Limited)

The education loan facility provided by Credila Financial Services Limited ('The Company') will be at the sole discretion of the Company and within the Company's prescribed credit and underwriting norms/guidelines prevailing at the time of processing and disbursing the education loan. The Company maintains the right to change the interest rate at any time and at its sole discretion, without prior notice.