“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.
WHAT YOU NEED FOR AN EDUCATION LOAN
- 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
How to get education loan without any collateral?
To get a loan from a lender, you generally have to pledge security such as house property, fixed deposits, shares, bond, etc., to take the loan. This is done so that in case you default on the loan, lenders can recover it by selling the pledged security. The security pledged against a loan is termed as collateral.
However, you can get an education loan without pledging any security. The Credit Guarantee Fund for Education Loans (CGFEL) Scheme provides a guarantee for education loan dispersed by banks under the Model Education Loan Scheme of Indian Banks’ Association (IBA). Under this scheme, you can get a collateral-free loan amount for up to Rs 7.5 lakh without providing any third-party guarantee.
There is no margin requirement if you apply for a loan within this limit through a scheduled commercial bank under the CGFSEL scheme. It means that the bank can finance up to 100 percent of the loan, if the loan is up to the limit of Rs 7.5 lakh. Under the CGFEL scheme you can get a loan up to Rs 10 lakh for study in India and up to Rs 20 lakh for studying abroad. But, if you take a loan of more than Rs 7.5 lakh, the bank may ask for collateral for the loan amount. The bank may also ask you to deposit margin money and seek third-party guarantee.
Gaurav Aggarwal, Director & Head of Secured Loans, Paisabazaar.com said that normally lenders require third-party guarantee or tangible collateral as security, depending on the loan amount. He said, “You do not have to provide collateral and present a third-party guarantee for a loan up to Rs 7.5 lakh under the CGFSEL scheme.”
Do all banks provide collateral-free education loan benefit?
IBA has formulated the ‘Model Education Loan Scheme’ to financially support meritorious students for pursuing higher education in India and abroad.
The guidelines issued by IBA for the CGFSEL educational loan scheme is generally followed by banks. However, the banks may vary in providing loans under the scheme as per their own internal rules.
Aggarwal said that some banks do provide collateral-free loan option to students looking to pursue higher education from premier institutes. However, it’s the bank’s sole discretion to waive off third-party guarantee or tangible collateral security requirement. He further explains, for instance, for loan up to Rs 4 lakh, lenders only require parents/guardians as joint borrower(s). But, lenders can ask for suitable third-party guarantee for loan amount in the range of Rs 4 lakh to Rs 7.5 lakh, besides having parents/guardian as a joint borrower.
However, “You will be required to provide tangible collateral security if the loan amount is more than Rs 7.5 lakh, along with the assignment of future income of the student for payment of installments,” he added
Can you get a collateral-free loan above Rs 7.5 lakh?
However, if your education loan requirement is more than Rs 7.5 lakh or even more than Rs 10 lakh, you can reach out to other lenders to get a collateral-free loan. Adhil Shetty, CEO, BankBazaar.com said, “Non-banking financial companies (NBFCs) and private lenders can provide you collateral-free loans for a higher amount, but these collateral-free loans are sanctioned at a slightly higher interest rate as compared to education loan taken with collateral.”
Process to apply for an education loan
Before applying for a collateral-free education loan, you must know that the student is the main borrower of the education loan and parent, spouse or sibling can be the co-applicant.,
Banks generally ask for co-applicant details when you apply for a collateral free loan. Not only this, banks also ask for the income documents such as salary slips or income-tax returns (ITR) of the co-applicant before sanctioning the education loan.
As per the Reserve Bank of India (RBI) guidelines, there are no restrictions on the upper age limit, but some banks may have it as per their own internal rules and regulations.
To apply for the loan, you should be an Indian citizen, having secured an admission into a college/university recognised by a competent authority (NAAC/NBA accredited Institutions/programmes or Institutions of National Importance or Central Funded Technical Institutions (CFTIs)) in India or abroad.
The lender will ask for the admission letter of the college/university with the fee structure of the course for which you have applied for the education loan. Apart from this, lenders may also require documents such as Class X, XII and graduation (if applicable) mark sheets.
When your loan application is accepted by the lender, then the lender disburses the amount directly to the college as per the given fees structure.
Points to remember
- All students taking education loan under the CGFSEL educational loan scheme also get one-year moratorium for repayment after completion of studies. Basically, lenders can give a relaxation of about one-year time to start re-paying the loan after you complete your education.
- Shetty said that the tax deduction benefit under Section 80E of Income Tax Act for interest paid on education loans is available only when you have taken the loan from a financial institution operating under the Banking Regulation Act, 1949 or an eligible trust/institution as per the prescribed rule. “So, when applying for a collateral-free loan of more than Rs 7.5 lakh from non-qualified institutions, you may miss out on the tax deduction benefit under Section 80E of the Income Tax Act,” he said.
- Generally, repayment period of education loan is 15 years. However, you should try to repay the loan amount at the earliest as tax-saving deduction benefit is available for up to 8 years only.
How to Get Education Loan From Bank?
Ajay Bohora, chief executive, Credila Financial Services, an HDFC Ltd company, says, “We have been noticing a surge in the number of students 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.
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.
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.
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.