Along with growing awareness about the importance of education to succeed in a knowledge economy, the cost of quality education, too, is growing fast.
From interest rate and fees charged to expenses covered, to repayment options, there’s much to consider
Harsh Roongta
Along with growing awareness about the importance of education to succeed in a knowledge economy, the cost of quality education, too, is growing fast.
Happily for the students, though, more parents are willing to bear that extra cost to fund their higher education.
The importance of education loan cannot be understated, given that it is the most cost-effective means of funding education if you are unable to get a full scholarship or do not have a generous aunt or uncle willing to sponsor your education.
Indeed, a large number of students, especially those pursuing professional courses in the country or abroad, are availing of education loans.
Going by latest data from the RBI, education loans disbursed by banks rose 51% to Rs 15,000 crore in 2006-07 from Rs 9,962 crore the previous year. The following are a few points you need to check while applying for a study loan.
Repayment options
Like for all other loans, you have to pay interest on education loans, too. But, unlike other loans, education loan provides the option of a moratorium period or a ‘repayment holiday’, which means, the borrower can suspend repayment of the loan till the education course for which the loan was taken is completed.
An education loan typically has three repayment options:
1. Education loan with repayment moratorium: Many banks stipulate repayment within 1 year of completing the course or six months of getting a job, whichever is earlier.
2.Interest alone is paid during the course period: After completion of the course of study, you start paying the actual EMI (principal and interest)
3.Repaying through EMI immediately after loan disbursement: In this case, you could get the loan at an interest rate lower by about 1%. The repayment conditions vary from bank to bank. So, talk to as many banks as possible to get the repayment option that suits your requirements.
Interest rates
Interest rate on education loan is lower than on a personal loan, but slightly higher than a home loan. Some banks offer a ‘fixed’ rate of interest, while others offer ‘floating’ rate of interest.
If the difference between fixed and floating rate is only about 1%, it is advisable to opt for fixed rate as education loans have shorter repayment tenures of 5-7 years.
Many banks do not offer a genuine fixed interest rate where the interest rate would remain fixed for the full tenure of the loan. They offer a fixed rate loan with a reset clause.
This means, the bank will have the right to revise rates after 2 or 3 years, or whenever the bank feels it necessary to raise interest rate. So, make sure you take a genuine fixed rate loan.
If it is a fixed rate with a reset clause, a floating rate may be a better option.
The choice between a fixed and floating rate is dependent on the risk appetite of a loan taker. If you are risk-averse and do not want to face the prospect of your EMI or repayment tenure shooting up in the event of an upward movement of interest rate, then you should go for a genuine fixed rate education loan.
However, if you feel interest rate will go down during the loan tenure and are willing to take a risk on that count, you can opt for a floating rate loan.
Many banks have special schemes for girl students. Some even offer 1% lower interest rate for girl students.
Processing fee
Many banks do not charge a processing fee for education loan. So, if your bank asks for a processing fee, you might be able to persuade the bank to waive it.
Prepayment fee
Again, in almost all cases, banks allow foreclosure or pre-payment of the education loan without charging a penalty if the borrower makes the payment from his own sources.
Banks charge a pre-payment penalty (usually up to 2% of the loan amount) if the loan is transferred to another bank.
Expenses covered by study loan
The amount of education loan sanctioned is in relation to the expenses that you will incur wile pursuing the course. The most common expenses covered include:
1.Fees payable to college/school/hostel
2.Exam/library/laboratory fees
3.Purchase of books/uniforms
4.Caution deposit/ building fund/ refundable deposit
5.Travel expenses/ passage money for studies abroad
You might have to incur costs besides these in course of your study, like those of instruments, laptops and other aids.
Some banks, like SBI, also offer loans up to Rs 50,000 for two-wheelers as part of education loans.
Banks provide about 80-90% of the cost of education as education loan. But, the important factor to check here are the education expenses recognised by your lender.
If a part of your education (course fee, for e.g.) is funded through a scholarship, you could still get a loan to cover the balance expenditure.
In such cases, most banks include the scholarship amount as part of the total cost of education. This way, you could end up financing the entire cost of your education through loans and scholarships.
It is always advisable to check with as many banks as possible before finalising your lender to get the best deal.
The author is the CEO of www.apnaloan.com and can be reached at ceo@apnaloan.com. Views are personal
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