A Comprehensive Guide to Education Loans in India
Everything you need to know about student loans to pursue higher education in India.
Indian banks in the public and private sectors offer education loans to help students get financial support to pursue higher education in India and abroad. These loans offer an opportunity to meritorious students to realise their dreams of pursuing higher education even if they come from economically weaker sections of society. In addition to loans, the Indian Government offers subsidy schemes on education loans to students who come from the underprivileged section of the society.
In this comprehensive guide on education loans, we are going to discuss higher education loans as well as interest subsidy schemes available to Indian students. We have followed a question-answer (Q&A) format so that you can spot the answer to your question about study loans. Let’s get started.
What is an Education Loan?
An education loan is a special lending scheme offered by banks and other financial institutions in India to help meritorious students pay for higher education. Some loan schemes may be offered for pursuing higher education in India while others may be geared towards students pursuing higher education abroad.
While most education loans are meant to pay for higher education such as undergraduate courses, postgraduate courses or research work, few schemes are also available to help pay for vocational courses, preparatory courses, coaching, etc.
Which Expenses Does an Education Loan Cover?
The loan amount sanctioned by the bank can be used to pay any fees or other charges that are a part of the standard tuition, hostel or any other institution-approved cost necessary to complete the course. In addition to fees, the loan amount can also cover any expenses on study tours, project works and thesis in addition to the purchase of study material (books) and equipment (laptop, etc.)
It must be noted here that in most cases, the loan amount is directly disbursed to the educational institution, bookseller or publisher, computer seller and so on but not to the applicant.
What are the Types of Education Loans Available in India?
Education Loans offered by Indian banks can be categorised based on factors such as type of course, type of education institution, special needs of the student, etc. Here are the types of education loans available to Indian students:
Education Loans Based on Location:
- Education Loans to Study in India: Some education loan schemes are designed to help students who want to pursue higher education in India. These loans cannot be availed for studying outside India
- Education Loans to Study Abroad: Indian banks offer special loan schemes to help Indian students pay for pursuing higher education programmes at recognised institutions abroad
Some Indian banks may offer an umbrella loan scheme that can be availed for studying in India as well as overseas. However, it is important to remember that the formalities for study-abroad loans are different and more comprehensive than for studying within the country.
Education Loans Based on the Course Type:
- Education Loans for Undergraduate Programmes: Students can avail of these loans to pursue their undergraduate courses. These may include bachelor’s degree or other graduate-level courses
- Education Loans for Postgraduate Programmes: These education loans help students of postgraduate programmes, doctoral or professional courses such MA, MSc, MPhil, MS, MTech and MBA as well PhD courses to pay for tuition fees, exam fees, lab fees, boarding expenses, etc.
- Education Loans for Vocational Courses: Govt-backed Pradhan Mantri Kaushal Vikas Yojana (PMKVY) and other loan schemes that help students pay for vocational and skill enhancement courses fall into this category. These are short-term loans and the quantum of loan is also relatively lower as compared to education loans for undergraduate level and postgraduate level courses
Some banks may offer a loan scheme that can be availed for undergraduate, postgraduate or integrated (undergraduate + postgraduate) courses
Education Loans Based on Types of Education Institutions
- Education Loans for Premier Institutes: Banks offer special loan schemes to students who secure admission into premier institutes in India. Students of IITs, IIMs, ISB, etc. can avail of these loans. The bank may not ask for a third-party guarantee or co-obligation of parents since the assignment of future income of the student is usually enough to secure these loans
- Education Loans for Non-Premier Institutes: These loans are not specifically labelled so but they cater to students who secure admission into non-premier institutes in India. Banks ask for parents to be co-borrowers of the loan to secure it. For loan amount higher than Rs. 4 lakh, the borrower may have to provide collateral security for the loan
The main reason behind the segregation of premier institutes by banks is that they expect the students from premier institutes to make it to the crème de la crème of organisations in India and abroad, and probably earn more than students from non-premier institutes.
Education Loan for Special Purposes
- Loans to Differently-abled Students: Few Indian banks cater to differently-abled students by offering special education loan schemes to help them pay for higher education in India and overseas. For instance, IDBI Bank offers an education loan scheme to physically challenged persons under the National Handicapped Finance and Development Corporation (NHFDC)
- Takeover of Education Loans: This facility allows students to transfer the outstanding principal of their existing loan from one bank to another. Students can avail of this facility if they are not happy with the terms offered by the existing lender or if they simply want to renegotiate the terms of the loan
- New Loan for Higher Education Course: If a student decides to pursue a higher degree than the one for which they had availed an education loan, they can apply for a new loan. The loan repayment of the existing loan is put on hold in this case. The repayment of the accumulated loan amount and interest starts after the end of moratorium of the second loan. If the new loan is availed of from a different bank, a balance transfer may have to be requested
What are the Eligibility Criteria for Education Loans?
- The borrower should be an Indian national
- The student should have secured admission in an eligible higher education course through an entrance test or a merit-based selection process in India or overseas
- Parents/guardians/spouse must be co-borrowers of the loan
- Eligible courses include graduate, postgraduate, doctorate, professional and vocational courses from recognised institutes in India and abroad
Parent/guardian/spouse can also apply as the primary borrower of an education loan to fund the higher education of the student.
What is the Loan Amount Offered by Indian Banks Under Education Loans?
Most Indian banks offer loan amounts based on various factors. They are:
- Type of Institution: Students who have secured admission into premier institutes in India can easily get loans up to Rs. 30 lakh or more while students of non-premier institutes may be eligible for loans of up to Rs. 15 lakh. This is simply because of the assumption that students of premier institutes get placed in higher-paying jobs
- Type/Duration of Course: Indian banks offer higher loan amount for post-graduate and doctorate courses as compared to short-term and vocational courses
- Location of Institute: Studying abroad is costlier because of higher tuition fees and other college fees, higher expenses related to living overseas and currency exchange rate. This is why banks offer higher loan amount to students who want to study abroad
- Status of Loan Security: If an education loan has been secured with collateral such as land or property, the bank is likely to sanction a higher loan amount as compared to an unsecured education loan. In fact, most banks only offer collateral-free loans up to Rs. 4 lakh, though some like HDFC Bank offer collateral-free loans upto Rs. 7.5 lakh for studying in India and up to Rs. 20 lakh for studying abroad
- Repayment Capacity: Banks may also decide to determine the loan amount by projecting the student’s earning capability after course completion. They may ask for the assignment of future income of the student to secure the loan. In some cases, they may also base the loan amount on the repayment capacity of the co-borrower (parents/guardians/spouse)
What are the Interest Rates and Other Charges Applicable to Education Loans?
Indian banks calculate the interest rate applicable to education loans based on two main factors: the Marginal Cost of Funds based Lending Rate (MCLR) and an additional spread sometimes referred to as Strategic Premium.
Other charges applicable to education loans are:
- Processing Fee: Some banks may charge anywhere from 0.5% to 2.5% of the loan amount for processing the loan
- Pre-payment Charges: If the borrower decides to repay some of the principal money in addition to the monthly loan instalment (called pre-payment of loan) then the bank may decide to levy a small fee known as a pre-payment charge / fee / penalty
- Penal Interest: If a borrower fails to pay one or more instalments of the loan on time, they usually have to pay penalty charges on the overdue amount
- Foreclosure Charges: If a borrower decides to completely pay off the loan before the end of the repayment period, the bank may charge a penalty known as a foreclosure fee / charge / penalty
Of these four charges applicable to education loans, the processing fee is the only one that the student must pay at the time of loan application. The rest come into effect during the repayment period of the loan, if applicable. Please note that some banks offer loan schemes where they do not take processing fee from the applicants or even prepayment or foreclosure fees.
What is the Repayment Period of Education Loans?
The repayment period of education loans is 5 to 7 years in most cases excluding the moratorium period. However some banks may allow upto 10 years or more in case the loan amount is higher.
The moratorium period of education loans is defined as the course duration and an additional grace period of 1 year or course duration and an additional grace period of 6 months after landing a job, whichever is earlier.
Please note that interest accrues during the moratorium period and this accrued interest also factors into the total amount repayable for the loan.
When are the Collateral and Third-party Guarantee Requirements of Education Loans?
The terms for securing an education loan may vary from one bank to another. However, the general terms are:
- Loans up to Rs. 4 lakh: Most banks offer collateral-free loans up to Rs. 4 lakh. This means that the borrower does not have to pledge collateral or provide a third-party guarantee to secure the loan. However, a parent/guardian must be the co-borrower of the loan
- Loans from Rs. 4 lakh to Rs. 7.5 lakh: Indian banks ask for a third-party guarantee and co-obligation of parent/guardian to secure loans from Rs. 4 lakh to Rs. 7.5 lakh. Some banks may also ask for the assignment of future income of the applicant to secure the loan. In certain cases, the bank may choose to offer an unsecured loan up to Rs. 7.5 lakh
- Loans above Rs. 7.5 lakh: Education loans above Rs. 7.5 lakh must be secured with collateral such as land or property and co-obligation of parent/guardian. The bank may also ask for assignment of future income of the student, a third-party guarantee, etc. to secure the loan
What are the Income Tax Benefits of Availing an Education Loan?
The borrower, i.e. student, parent, guardian or spouse who is paying interest on an education loan can avail of tax benefits under Section 80E of the Income Tax Act. The deduction is allowed on interest (not on the principal amount) for 8 years only.
What are the Documents Required to Apply for Education Loans in India?
The formalities for education loans may vary from one bank to another or depending on the type of the loan. Here are the documents that students must furnish to apply for an education loan:
- Duly filled and signed application form along with details of applicant, co-borrower and guarantor
- Two passport size photographs of the student
- Photocopy of PAN card of the student
- Personal ID Proof (any one): Electoral I-Card, Passport, Driving License, PAN Card or Aadhaar Card
- Residential Address Proof (any one): Electricity Bill, Landline Telephone Bill, Electoral / Voter ID Card or Passport
- Admission letter and prospectus along with fee structure with demand of fee by the institution
- Proofs of past academic record such as marksheets and degree certificates
- Security-related documents wherever applicable
What are the Interest Subsidy Schemes Offered by the Indian Government on Education Loans?
The Government of India offers a few interest subsidy schemes on education loans under which the interest levied on the loan amount during the moratorium period is paid by the government. These schemes are designed to reduce the overall debt burden on the students.
The students have to apply for interest subsidy schemes separately after getting approval for the education loan. Eligible students are not automatically entitled to the benefits of these schemes because there are limited number of “seats” available. After the completion of the moratorium period, the student must repay the loan as per the repayment schedule.
The three types of interest subsidies on education loans are:
- Central Sector Interest Subsidy (CSIS) Scheme: This interest subsidy scheme is offered by the Central Government to students from economically weaker sections of the society who have availed of a study loan to pursue higher education. It applies to undergraduate, postgraduate, integrated or doctoral courses from accredited universities and institutions. The student must furnish an income proof to support the claim that the annual income of the family is less than Rs. 4.5 lakh
- Padho Pradesh Scheme of Interest Subsidy for Education Loans: The Padho Pradesh interest subsidy scheme is offered by the Central Government to students belonging to the minority communities pursuing Masters, MPhil or PhD level courses outside India. The maximum number of students who can avail this subsidy in a year is capped at 400 for the whole country, with specific numbers assigned to each community in each state or UT. The annual income of the family must be less than Rs. 6 lakh
- Dr. Ambedkar Central Sector Scheme of Interest Subsidy for Educational Loans: This interest subsidy scheme is offered by the Central Government to students belonging to the Economically Backward Classes (EBC) and Other Backwards Classes (OBC) pursuing higher education abroad. OBC students have to furnish a valid caste certificate. The annual income of the family must be less than that specified for the creamy layer for OBC candidates and less than Rs. 2.5 lakh for EBC candidates
Note: Students can only avail of a subsidy scheme once. This means that they are not eligible for an interest subsidy at the postgraduate level if they have already availed of it at the undergraduate level and so on. If you are interested, you can check out our page on interest subsidies on education loans.
Other Features of Education Loans
- Female students may get a concession in the interest rate on some loan schemes
- Some banks may charge simple interest each month during the moratorium period
- The accrued interest during the moratorium period is added to the principal loan amount to calculate the monthly instalment aka Equated Monthly Instalment (EMI)
- The bank may ask for the student’s progress report at regular intervals
A Final Word
Education loan is probably the first loan that most people apply for in their adult lives. Therefore, it is crucial to spend some time in choosing the right loan scheme and finding suitable terms of repayment. Details of this loan and your repayment history will also likely be the first thing captured on your credit report. How you handle the repayment of this loan will determine if banks will consider you to be a good candidate for a credit card, car loan, home loan, etc. in the future.
If you are interested in more specific details on different education loans, you check out our education loans section where we have covered education loans offered by major Indian banks in some detail.