India is witnessing an increasing demand for education loans amid skyrocketing higher education costs. Those aspiring to study abroad necessarily need an education loan unless their parents are wealthy. 

However, taking an education loan for higher studies in India or study abroad is a huge financial decision for anyone. It has a long lasting effect on the borrower’s financial life, especially in prime years.

In this age of decentralised online learning, we must check if it is worth getting an education loan and if yes, how should one go about it.

Why and how much?

There are some preliminary questions to start with while deciding on and education loan:

1. What is the purpose of education? Is the program you are fancying offering something which domestic institutions/internet cannot offer? 
2. Are you opting for this education for the sake of alumni network and university tag?
3. Which country, university and program are you opting for?
4. What is the duration and costing of the selected program?
5. What are the future employment prospects?
6. Can you get any financial aid/scholarship?
7. Can you offer any collateral to your lender if needed?
8. Are you eligible for any government scholarship/aid?
9. Can you get a co-applicant?
10. What is your/co-applicant’s CIBIL score?

Whom to approach for an education loan?

Overall, public sector banks are the preferred choice when it comes to education loans. At least someone in the family usually has an account running with state lenders, so some banking relationship already exists. 

Also, public sector banks allow repayment holiday during moratorium period (your course or degree duration + 6 months/year as per the lender terms), which may not be the case with private banks. However, loan insurance is mandatory in most private sector banks which is not the case with public sector banks. 

Types of education loans

1. Secured loans: These are backed by some assets (typically real estate) of the borrower. Security is needed for many high ticket loans who are aiming for foreign degrees. These loans are the ones which can get as high as Rs 1.5 crore. 
2. Unsecured loans: One can get up to Rs 7,50,000 without offering any collateral from govt banks. These are known as unsecured loans. Otherwise, one can approach different NBFCs but terms of these loans are not very favourable. (High interest rate being the primary one). Even private banks can offer unsecured loans. Loan amounts usually depend on the country you will be travelling to.

Some important terminologies

1. Tenure of education loan:  Varies between 8 years to 15 years.
2. Fixed rate vs floating rate loan: Education loans on fixed interest rate will make the borrower pay the same rate of interest throughout the tenure. While floating rate loans will have their rate of interest tied to a benchmark which moves with RBI’s repo rate change.
3. Loan margin: Simply put, this is your contribution to the cost of your degree. If the margin is 10%, it means the education loan will cover 90% of your total expenses while you will have to bear 10% yourself. If you have opted for some premium institution within the country – loan margin can go down to nil as well!
4. Collateral margin: In case of secured loans, the lender will have some margin with regards to the value of your collateral. If you are offering a residential property worth Rs 1 cr as collateral, the lender will offer you Rs 90/80 lacs as education loan. This margin is known as collateral margin.
5. Processing fees: As with all other loans, processing fees will be payable on education loans as well.

Repayment of education loans and taxation

Since some education loans have long tenures, many people prefer pre-paying them as their income rises or when they get bonuses. As per RBI guidelines, no foreclosure charges can be levied in case of education loans.  

Education loan interest paid is tax deductible under section 80E of Income tax act 1961. The deduction is available until 8 years or until your interest is repaid – whichever is earlier.

Thus, most borrowers prefer to foreclose their loans during these 8 years. 

Some important parting thoughts

1. If you are applying for premier institutions within the country, please check for the list of empanelled lenders. They will most likely have offers curated for your needs.
2. If you are offering any property as a collateral, you may be asked to take property insurance. 
3. In case of pledged property, you will also have to bear the mortgage creation charge. The lender would want to make sure that you cannot sell the property while the loan is still outstanding.
4. Additionally, lenders can ask you to buy health insurance and travel insurance. It is not mandatory to buy it from their affiliates though.
5. To avail the deduction under Section 80E, it is required that you borrow from recognised financial institutions or charitable organisations. Loans from friends and family do not qualify for this deduction. 

It is always good to read the terms and conditions being offered to you under any education loans scheme. Education loans have grown at a record 17% during the last financial year and the trend is likely to continue. So, expect more agility in the loan terms going forward.

All the best for your future study plans!

Disclaimer: The above content is for informational and educational purposes only. Not advice. Please consult your financial advisor before making any decision.