Need an education loan? Read this article first
You've passed your exams and enrolled in the course that's right for you. Excellent work! But now you need to focus on financing. It doesn't matter how great your marks -- or the path you've chosen -- if you can't pay your fees.
The first step to funding your higher education is understanding the loan process. Each year, millions of college hopefuls flood into Indian banks to get financial support for their college careers. It can seem daunting, with dozens of forms from multiple institutions, but knowing where to start and what to ask can make a world of difference.
Am I eligible for a student loan in India?
Eligibility requirements differ slightly from bank to bank, but many institutions have similar criteria to help ensure responsible lending and utilization of funds. For example:
- Borrower and co-borrower must be Indian citizens
- Borrower must be 18 years of age or older
- Borrower or co-borrower must have an account at the lending bank
- Borrower must be able to confirm admission at a college
- Borrower must be enrolled in a higher studies course, which includes undergraduate, graduate and post-graduate courses and certificates approved by UGC or the State government. Vocational training and skill development courses may not qualify for some loans.
To see if you and your chosen course are eligible for a loan with a specific bank, contact a representative in person, via phone or online.
What forms do I need?
No matter which bank you select as your lender, you'll need to have extensive documentation. Banks want to lend to qualified students who will be able to repay their loans quickly and without complication. When discussing loan options with a bank, make sure you have the following forms with you:
- Mark sheets from your XII exam
- Results of your competitive (course) admission exam (if applicable)
- Proof of college admission
- Expense schedule for your course
- Bank account statements for last six months
- Income tax assessment order for last two years
- Statement of assets and liabilities of co-borrower
- Proof of income (borrower and/or co-borrower)
- Proof of Indian nationality
- Loan application form (provided by each bank)
Again, requirements may vary from bank to bank, but having these forms handy places you on solid footing and can minimize the back-and-forth game you play with your lender.
What fees will my education loan cover?
Institution and course generally dictate the amount of the loan. For instance, tuition and fees at Delhi University may differ from those at the University of Pune. However, banks typically cover all tuition fees and a percentage of other expenses, including living expenses, books, lab fees, exam fees, etc. Some banks, such as the State Bank of India, even cover the cost of two-wheelers and travel for qualified students.
How much can I borrow?
For studies in India, many banks disperse a maximum loan amount of Rs. 10 lacs. Studies abroad carry a max of Rs. 20 lacs.
Do I need a co-borrower or collateral?
Nearly all students need a parent or guardian to support their loan, while married persons have the option of using a spouse, as well. Collateral, also called "security", however, depends on the amount of the loan:
- Up to Rs. 4 lacs: Minimal to no security required
- Between Rs. 4 - 7.5 lacs: Usually a third-party guarantee only.
- Above Rs. 7.5 lacs: Physical collateral of suitable value, viz a house, apartment or other asset, along with an agreement to assign a percentage of future income to the bank for loan repayment.
What is margin?
Margin is the amount of money the borrower brings to the loan, kind of like a down payment. Banks use margin as a way to ensure students have some of their own money involved and therefore concentrate on spending loan money wisely. Studies in India usually require a 5 percent margin, while studies abroad generally necessitate 15 percent.
Interest rates seem complicated. What do I need to know?
BLR: Each bank has a BLR (base loan rate) that serves as a starting point for all student loans. Before you apply for a loan at a bank, make sure you know that bank's BLR.
Spread: An addition to the BLR based on risk. The bank usually determines an applicant's spread by analyzing his or her academic performance, marks, employability of college course and country of study. Your interest rate will be the bank's BLR plus your spread.
Fixed versus floating interest: A fixed interest rate remains the same throughout the entirety of the loan. A floating interest means the rate could change if the bank's BLR increases or decreases.
Simple interest versus compound interest: Simple interest rates always use the "Year 1" repayment amount when calculating the following year's amount. For example, if a borrower repays 1000 lacs during Year 1 at 10%, the Year 2 repayment amount will be 1100 lacs. Year 3 repayment will be 1200 lacs, adding another 100 lacs each year during the life of the loan.
Compound interest rates use the current year of the loan to calculate next year's repayment amount. Here's a table to illustrate the difference:
|5000 lac loan at 10% interest||Repayment Amount (Simple)||Repayment Amount (Compound)|
|Year 1||Rs. 1000||Rs. 1000|
|Year 2||Rs. 1100||Rs. 1100|
|Year 3||Rs. 1200||Rs. 1210|
|Year 4||Rs. 1300||Rs. 1331|
|Year 5||Rs. 1400||Rs. 1464|
How do I receive my loan funds?
Banks generally disperse loan funds in Indian Rupees, so if you're attending a foreign college or university, you may get charged an exchange rate fee.
Tuition fees are sent to the institutions directly on your behalf, with loan money related to other expenses dispersed in installments throughout the life of the loan.
What are loan repayment terms?
Repayment terms dictate how a borrower will pay back the money used for his or her education. Actual repayment typically begins one year after the completion of a course or six months after securing employment, whichever comes first.
For both studies in India and abroad, banks ask borrowers to repay loans within five to seven years.
Any quick tips for borrowers like me?
1. Ask questions, no matter how small. The loan process can be difficult to understand for those unfamiliar with the process, and can vary from bank to bank.
2. Ask each bank about processing fees. Some banks charge a small amount to process your loan, and some don't.
3. Visit multiple banks. This way, if your first bank turns you down for a loan, you have other banks available.