Obtaining a quality education has become more important than it ever was! However, the rising education costs in India can be a significant barrier for many students and their families. Education loans have emerged as a viable financial solution, providing aspiring students the means to pursue their dreams without financial constraints. In this blog, we will explore the current education loan scenario in India, the benefits of an education loan, and the challenges applicants may encounter. Additionally, we will provide seven valuable tips to navigate the education loan process effectively.
Current Education Loan Scenario in India
The education loan landscape in India has witnessed substantial growth in recent years. According to a report, India’s outstanding education loan amount stood at INR 80,000 crores as of June 2022. This surge indicates the increasing demand for education loans as students strive to secure higher education opportunities.
Various financial institutions offer education loans in India, including public and private banks, non-banking financial companies (NBFCs), and government bodies. These loans cover various courses, both within the country and abroad. However, lenders’ terms and conditions, interest rates, and repayment options may differ.
Benefits of Education Loans
- Financial Assistance: Education loans bridge the affordability gap for students, enabling them to pursue higher education without relying solely on personal funds or family savings.
- Lower Interest Rates: Compared to other types of loans, education loans typically offer lower interest rates, making repayment more manageable for borrowers.
- Tax Benefits: Under Section 80E of the Income Tax Act, the interest paid on education loans is tax-deductible, reducing the overall financial burden for borrowers.
- Flexible Repayment Options: Education loans usually come with flexible repayment terms, including a moratorium period during the course duration and a reasonable grace period after graduation before repayment begins.
Also Read: Things You Need to Consider Before Getting Education Loan For Your Higher Study
Challenges of Education Loans
- Stringent Eligibility Criteria: Eligibility for education loans may vary among lenders, and some students might find it challenging to meet the stringent requirements, particularly if they need a strong credit history or a co-signer.
- Loan Amount Limitations: Certain education loans may have a maximum loan amount limit, which could fall short of covering the entire cost of education, especially for expensive courses or international studies.
- Fluctuating Interest Rates: Some education loans have variable interest rates, making it difficult for borrowers to predict future repayments accurately.
- Potential Default Risk: Students who fail to secure gainful employment after completing their education may face difficulties repaying the loan, leading to default and adverse credit consequences.
7 Tips for Your First Education Loan in India:
1. Choose the Right Lender:
Selecting the right lender is the first step toward securing an education loan. In India, various financial institutions, including banks and non-banking financial companies (NBFCs), offer education loans. Each lender has its terms, interest rates, and repayment options. Research different lenders, compare their offerings, and select the best suits your needs.
According to the Indian Banks Association (IBA), as of September 2022, public sector banks accounted for nearly 90% of India’s total education loan portfolio. However, private banks and NBFCs have increasingly offered education loans to cater to the growing demand.
2. Understand the Loan Amount and Eligibility:
Before applying for an education loan, assess the total cost of your education, including tuition fees, accommodation expenses, books, and other related costs. Make sure the loan amount you apply for covers all these expenses adequately. Additionally, familiarize yourself with the eligibility criteria set by the lender. Typically, lenders consider factors such as academic performance, the reputation of the institution, and the co-borrowers income and credit history.
The Reserve Bank of India (RBI) reported that the average ticket size of education loans has increased steadily over the years. As of June 2023, the average ticket size was around INR 24-26 lakhs.
Also Read: Education Loans: How they are Bridging the financing gap
3. Compare Interest Rates and Other Charges:
Interest rates play a significant role in determining the cost of your education loan. Research and compare the interest rates offered by different lenders. Choose a lender that provides competitive interest rates and transparent terms. Additionally, be aware of other charges, such as processing fees, prepayment charges, and late payment penalties. These charges can significantly impact your overall loan burden.
As of August 2023, the interest rates for education loans in India ranged from 8.5% to 16%, depending on the lender, loan amount, and repayment tenure.
4. Check for Moratorium Period and Repayment Terms:
One of the key advantages of education loans in India is the moratorium period, during which you don’t need to make any repayments. This period typically lasts for the course duration and a few months after completing the course or securing employment. Ensure you understand the moratorium period the lender offers and the repayment terms that follow. Plan your finances accordingly to avoid any financial strain during the repayment phase.
The RBI has allowed banks to offer a moratorium of up to 7 years for education loans. The moratorium period may vary depending on the lender and the course duration.
5. Evaluate Collateral and Co-borrower Requirements:
Education loans in India can be secured or unsecured, depending on the loan amount. For higher loan amounts, lenders often require collateral, such as property, fixed deposits, or life insurance policies. If you don’t have sufficient collateral, explore lenders who offer unsecured loans or consider a co-borrower, such as a parent or guardian, with a stable income and good credit score.
6. Be Aware of Tax Benefits:
Education loans in India come with certain tax benefits. Under Section 80E of the Income Tax Act, borrowers can claim a deduction for the interest paid on the education loan during the repayment period. However, remember that this deduction is available only for the interest component, not the principal repayment.
As per the Income Tax Act, there is no upper limit on the deduction allowed for the interest on education loans. Borrowers can claim the deduction for a maximum of eight years or until the interest is fully repaid, whichever is earlier.
7. Maintain a Good Credit Score:
A good credit score is crucial when applying for any loan, including an education loan. A higher credit score improves your chances of loan approval and helps you negotiate better terms and interest rates. Pay your bills and dues on time, manage your credit responsibly, and avoid defaults to maintain a healthy credit score.
Conclusion:
Taking out an education loan can be a wise investment in your future. By following these seven essential tips, you can make the process of availing your first education loan in India smoother and more manageable. Remember to research your options, understand the terms and conditions, and plan your finances prudently. With a well-thought-out approach, you can focus on your studies without the burden of financial constraints, turning your dreams of higher education into a reality.
Education loans are available from a variety of lenders but finding the best loan providers in India is a challenging task. Varthana is driven to help students like you with financial assistance to make your educational journey as smooth as possible. Apply now
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