In this competitive world, pursuing higher education has become more valuable today than ever. However, on the other hand, increasing rates for tuition fees and living expenses have made it challenging for several families to afford quality education. This is exactly where education loans enter to help achieve academic aspirations.
Let’s bust some of these myths to help you better understand how education loans really work, particularly in the Indian context.
Myth 1: Education Loans are Hard to Get
Reality: There is one myth which has the most prevalence – the education loan is extremely difficult to get, at least for middle-class families. Although any kind of loan has to be sought with some amount of formality, banks and financial institutes have made educational loans progressively easier. The Indian Bankers Association report on education loans says that most such students who meet minor eligibility criteria, like securing admission into a recognized institution, are eligible for a loan.
And then there are interest subsidy schemes like the Central Sector Interest Subsidy Scheme to support students from economically weaker sections, making the loans even cheaper. The major public and private sector banks in India also have specific schemes for education loans that ease their procedure and repayment options. So, if you have your admission letter, you are half-way there!
Myth 2: You Need a High Collateral for Every Loan.
Reality: True, but exaggerated too many times. All banks in India offer education loans without collateral for an amount up to 7.5 lakh; as per RBI guidelines. Many other schemes, like the Credit Guarantee Fund Scheme for Education Loans (CGFSEL), are available without providing any collateral. For loans above this amount, collateral may be asked for, but that doesn’t mean you have to pledge your house or other important assets. The collateral could even be in the form of fixed deposits, bonds, or even LIC policies.
Many banks, especially those with tie-ups with premier institutes, also provide students chosen at the premier institutes like IITs, IIMs, and AIIMS loan facilities with reduced or no collateral requirements.
Myth 3: Only Professional Courses Eligible for Loans
Reality: Although it is true that professional courses such as engineering, medical, and management courses are mainly undertaken with education loans. It cannot be said to be the only truth since research carried by the Centre for Financial Inclusion in India has established that loans are also taken for non-professional programmes-arts, humanities, and even vocational training courses.
Education loans can also cover international courses and studies, considered challenging in terms of funding. You would like to study in Paris for fashion design, or you want to learn archaeology in India – as long as the course is recognized by the authorities concerned, an education loan is possible.
Myth 4: Just the Bank Education Loans
Reality: People think that they can approach the traditional banks for an education loan. However, the Indian education loan market has seen very significant development over the years; many NBFCs, fintech companies, and specialized lenders have come into the space offering competitive rates and innovative loan products especially suitable for students.
Education loans provided by fintech players like Varthana are much faster to process and come with added benefits such as zero prepayment penalties and flexible disbursement options. Increased types of loan providers leads to increased accessibility of the type of loan products available to students.
Myth 5: Interest Rates are Too High
Perception: Education loans have sky-high interest rates: This is a myth. Interest rate varies between 6.5% to 10% of the education loan offered by public sector banks as per course and university, which is much better than personal loans or forms of unsecured credit.
Besides, there are interest subsidies offered by both central and state governments in India. For example, CSIS will provide students from economically weaker sections an option to take interest subsidies for the moratorium period, that is, the period during which a study will take place plus six months to one year. Even NBFCs and fintech lenders offer competitive rates, sometimes even lower than any commercial banks, depending on your credit profile and institution.
Myth 6: Repayment Starts Right after Graduation
Reality: Most students seem to believe that repayment of their education loan would begin immediately after their graduation, adding more pressure to find a job as soon as they complete their studies. This is not the case for most loans.
Most Indian banks have an optional “moratorium period” during which the student is exempted from repayment. It usually ranges from the course duration to 6-12 months post their graduation date or until they get employment, whichever is earlier. With this grace period offered by IBA Model Education Loan Scheme, students can continue with repayment so that there would be time to gain confidence in professional life before loan repayments begin.
Myth 7: You Can’t Avail Tax Benefits on Education Loans
Reality: This myth couldn’t be further from the truth. Education loans come with significant tax benefits. Under Section 80E of the Income Tax Act, the interest paid on education loans is fully deductible from your taxable income for up to eight years, starting from the year you begin repayment.
While there are tax benefits for interest payments, they are only on interest payments and not on the principal amount. Since education loans offer long tenures with the banks, this tax relief can be very helpful to most families.
Myth 8: Once You Get a Loan, You Are in Debt Forever
Fact: Although it is understandable to be prudent while taking debt, an education loan is usually considered a good debt. Findings suggest that students borrowing education loans are highly motivated to complete their education and start their careers. According to the National Institute of Financial Management, over 90 per cent of the borrowers pay back the education loans in the prescribed timeframe. Most of them repay it early once they secure jobs with decent salaries.
More so, with flexible repayment plans, EMI waivers, and income-based repayment options offered by various banks and financial institutions, repaying an education loan does not seem as formidable a task.
Conclusion
Education loans have become a lifeline for millions of students who want to pursue a higher education in India. Despite common misconceptions, these loans offer a practical solution by providing the financial support needed to cover the educational expenses.
Many recent studies show a dramatic rise in the number of education loans disbursed annually in India. These loans provide numerous benefits, including no-collateral options, affordable interest rates, and flexible.
Don’t let myths prevent you from exploring this valuable opportunity. If you’re considering an education loan, do your research, understand the several loan terms and options, and then choose the one that best meets your needs. With informed decisions, your education loan can become a stepping stone to a brighter future, not a financial burden.
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