money matters for students

All You Wanted to Know About Education Loan

Graduation courses like B Com, B Sc, BMS, BA etc typically will cost you between Rs 10,000 to Rs 20,000 per year. Engineering will cost you anything between Rs 75,000 to Rs 2 lacs per year. MBA will cost you between Rs 1.5 lacs to Rs 8 lacs per year. Other specialized courses can cost you anywhere between Rs 2 lacs to Rs 5 lacs. PhD and other advanced courses will cost you in upwards of Rs 10 lacs. And if you have aspirations to study abroad then look at shelling out between Rs 15 lacs to Rs 25 lacs.

We as a society value education very highly. Education builds capability and natures your skills. For some of you education is a matter of status.

But unfortunately the cost of education is becoming prohibitive and many are not able to afford it. Parents are expected to have a savings of anything between Rs 3 lacs to Rs 15 lacs by the time their children attain 19-20 years of age. Parents who have not prepared adequately end up grappling with a huge problem. Students like you may have career aspirations but family financial position may be a huge deterrent.

Education loan does provide solace.

What is an education loan?

In case you do not have money to pay the fees for your studies then you can borrow money from various banks and financial institutions. This type of borrowing is called as education loan. Education loan can be taken by the parents for their child or the student can directly take the loan.

Education loan can be availed for almost all studies post your 12 standard which includes:

  • Graduation courses such as B Com, B Sc, B A etc
  • Post graduation courses such as Masters degree, PhD
  • Professional courses such as Medicine, Engineering, Management, Law, Veterinary, Dentistry
  • Computer certificate courses of reputed institutes accredited to
  • Courses like ICWA, CA, CFA etc.
  • Courses conducted by IIM, IIT, IISc, XLRI, NIFT etc.
  • Courses offered in India by reputed foreign universities
  • Evening courses of approved institutes.
  • Other courses leading to Diploma/Degree etc. conducted by colleges/Universities approved by UGC/Govt./AICTE/AIBMS/ ICMR etc.

You can take an education loan for a maximum of Rs 10 lacs and if you are going abroad you can take a loan of up to Rs 20 lacs.

Your education loan can cover all the following study expenses:

  • Tuition fee of the Institutes/College/School
  • Hostel fee, Exam Fee, Library Fee, Laboratory Fee
  • Expenses for purchasing books, uniforms, special equipment etc
  • Various kinds of refundable deposits that could be asked for by an institute
  • For the purchase of necessary items like computers
  • Travel Expense & Passage Money in case of education abroad
  • Other expenses that may be a pre-requisite for the completion of the course, which might include expenses incurred for study tours, thesis, dissertation, etc.

How do you apply for education loan?

Most banks offer education loans. There are also specialized institutions like Credila which offer education loans.

Banks while providing you an education loan will be looking at your academic performance, the admission you have secured, your parents' repayment capability, etc.

While applying for an educational loan it is compulsory to have a co-applicant. The co-applicant is usually your parent. Few banks allow siblings, relatives or guardian to be your co-applicant. A co-applicant is like a joint account holder where both you as the applicant and the co-applicant will be liable for the loan.

You and the co-applicant will have to furnish the following documents while applying the loan:

For applicant

  • Admission letter of the Educational Institute giving details of year wise fee, boarding and lodging expenses. Letter confirming scholarship, if any.
  • Copy of mark sheets/degree certificates of previous academic qualifications from Secondary School Certificate.
  • Copy of Passport/Visa, cost of air fare (documentary detail) in case of studies abroad.
  • Attested copies of documents for proof of age/date of birth and proof of residential address.
  • Passport size photo of the applicant.
  • Details of collateral security along with valuation certificate of Govt approved valuer (if any).
  • Details/statements of Bank accounts held by the student applicant for the last six months.

For co-applicant

  • Passport size photo of the co-obligants
  • Income proof/latest income tax return of parents/co-obligants
  • Details/statements of Bank accounts held by the co-obligant(s) for the last six months.

In case your loan amount is below Rs 4 lacs you need not have to provide any collateral or guarantor. Collateral is a security against the default of your loan.

If your education loan is between Rs 4 lacs to Rs 7.5 lacs, you have to provide a guarantor. A guarantor is someone who promises to pay the loan amount in case you and the co-applicant fail to pay back the loan. A relative or family friend can become a guarantor. The documents to be submitted by the guarantor include passport size photo, income proof/latest income tax return, last 6 months bank account statements.

In cases where the education loan exceeds Rs 7.5 lacs you and the co-applicant or your guarantor is expected to provide collateral. Collateral can be in the form of land, house, investments etc. Giving a collateral means that in case you, co-applicant and the guarantor fail to pay the loan money the bank will have the authority to sell your land/ house or investments and recover the loaned money.

Once you provide all these documents it may typically take 7-15 days to get your loan sanctioned. If your loan amount is less than Rs 4 lacs then the bank will give you all the money. If your education loan is more than Rs 4 lacs then you are expected to give 5% of the loan amount to the bank as margin. For example if your loan is Rs 6 lacs you need to give Rs 30,000 to bank as the margin. Margin money is taken just to ascertain your re-payment capability.

Money will not be given to you but paid in the name of the institute. The money will not be paid at one go. The payment will happen on semester basis or on yearly basis. You need to submit the marks sheet of previous examination for getting loan in the next semester.

You can now fulfill your career aspirations and look forwards for the coveted job. But mind that just getting admissions in a good college will not get you the right job. You need to study hard and score well. Companies will give jobs and salaries for students who can contribute with their skills and capability.

Education loan is not a free lunch. You need to pay for it! Let us understand when and how much you have to pay.

Cost of your education is an expense which you incur for a prospective future. Since you do not have the money to spend today you take an education loan and study. And remember ultimately you need to pay back the loan with interest. Your loan amount will approximately double every 5 years. For example you have taken a loan of Rs 5 lacs you will end up paying Rs 10 lacs back to the bank at the end of 6 years.

You can decide to pay back the loan in 3/ 5 /7 or a maximum of 15 years. Your re-payment will be in the form of EMI (monthly installment). EMI will be calculated by the bank depending upon the prevailing interest rate. Bank will not ask you to pay EMI during the course period. After completing your course and getting your job you can start paying the EMI. Few banks let you pay EMI 6 months or up to 1 year after getting your job. This is to give you enough time to settle and earn in your job. It does not mean that you are not charged any interest for that period. Although some banks may defer interest payment, interest is actually calculated from the day of disbursement of the loan. You will end up paying more interest and hence we advise you to start repaying the loan as soon as possible. 

How to choose the right bank for taking your education loan?

Interest rate

Comparison of interest rates offered by various banks is the most important activity while selecting any loan. Due to competition in the loan market rates offered will be more or less similar. The interest rate on an education loan depends on whether you are studying in India or abroad, the course that you are applying for, your loan amount and the tenure.

Enquire if the rate is a fixed one or floating one. Floating interest rate loans are a little cheaper than fixed rate ones. Most loans available offer a floating rate interest. Education loans have a repayment period of maximum 15 years. If the bank offers option of interest payment immediately after loan disbursement this is good for you because it will reduce the burden of repayment later.

Apart from the rate other important information you need to consider is how the bank calculates interest payment. Although some banks may defer interest payment interest is actually calculated from the day of disbursement of the loan. Find out if the interest is calculated on a quarterly reducing balance or daily reducing balance.

Service quality

Always check for the service levels of your bank. Go with the banks you have already have good experience. Check their branch network and online capabilities.

Processing fee

Most of the banks offer education loan without any processing fee. Check for any processing fee if it looks that your bank is offering lower interest rate than other banks.

100% tax benefits can be availed by parents or you under section 80 E on the interest paid on education loan.

Don't get screwed up with your education loan

An education loan is meant to finance one of the best assets ever. Don't let it become a trap to be entangled in after you complete your education.

Look out for the cheapest way of educating yourself. Find out if you will be eligible for any kind of scholarship, grant or subsidy from all relevant sources such as the government, religious or other cultural organizations or trusts handing them to meritorious or needy students.

Do not go over board and spend on your education. Be very careful while choosing your course and institute. Education loan can turn out to be a huge liability and a personal finance disaster if you are not prudent

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