Education loans - do your homework diligently

17 April, 2016

Even as you anxiously refresh your mail-box waiting for the sacrosanct admission offer from your dream institution, you have to simultaneously deal with the question of funding these expensive courses.

In India, graduate or post-graduate education can cost you anywhere between thousands of rupees to around ₹30 lakh. If you want to study overseas, you might have to shell out ₹30 lakh to ₹1.5 crore.

Unless you have been lucky enough to get a university fee grant or some other scholarship, you might have to take recourse to an education loan to finance your education.

Process and offerings
Banks offer education loans without collateral if the loan value is up to ₹4 lakh. Girl students are charged 0.5 per cent lower interest. At times, banks can insist that the student contributes 5-20 per cent of the total fees from his own funds.

State Bank of India (SBI) gives loans without any collateral for students enrolled in such institutes as IIT, ISB, IIM, NIT, and AIIMS among a few other premier institutes. A collateral-free loan of ₹20 lakh or more with a reduced interest is offered to these students. This facility is also available for studying in foreign universities. The detailed list of colleges is displayed on the bank's website.

Banks allow a moratorium period of six months to one year after graduation to enable the student to find a job and start the repayment. The repayment period ranges from five to 15 years. The interest rate depends on changes in base rate. It currently varies between 9 and 13 per cent based on the field of study, university, location and other criteria.

Most banks offer a maximum secured loan of ₹30 lakh for education in India and ₹40 lakh for studying in a foreign institution. SBI's new Global Ed-vantage scheme offers loan amounts of ₹20 lakh-1.5 crore for overseas education. The value of the collateral accepted by the bank should be equal to 110 per cent of the total loan amount plus five year's simple interest.

Credila, an arm of HDFC, specialising in educational loans, customises the loan and interest payments based on the student's past academic record, employment history, co-borrower details, destination of study, university (accreditation, repute and ranking), field of study, economic and legal environment. Based on these analyses and the collateral value, HDFC Credila takes a decision on the maximum amount that can be lent. The average domestic and international loan size is ₹6.5 lakh and ₹15.5 lakh, respectively. The interest rate varies between 10.75 and 12.95 per cent. The interest is calculated for the amount disbursed from the date of disbursement.

Payback time
The equated monthly instalments (EMIs) are generally expected to run over seven years. The maximum duration can be 15 years. The faster you pay back the loan, lower would be the interest component. Some banks like Indian Overseas Bank offer an interest rebate of 1 per cent for prompt loan repayment.

In many cases, the parents pay the interest portion while their children are studying and during the moratorium period. If interest is not serviced promptly, as time progress, interest is levied on the earlier accumulated interest also. The student starts paying back both the principal and the interest once he starts earning.

Considering the average repayment period as seven years, EMI, on an average for loans borrowed to study in India, can vary from ₹10,000-₹35,000 a month. In case of foreign universities, the EMI can range from ₹30,000-₹50,000 or more per month. No penalty is levied for prepayment of the principal.

Precautionary measures
HDFC Credila advises student to take disbursal in tranches for effective fund management. This minimises the interest cost to the best possible extent for the student and the co-borrower.

Some banks fund living expenses as part of the loan amount. In case of a mid-carrier shift to pursue higher education, it is advisable that post-graduate students fund their living expenses and part of their tuition fee from savings accumulated in their previous jobs.