Education Loans: Good grades to pay

If you are a meritorious student, getting an education loan will be easier and you can even bargain with the bank for a lower rate of interest. The Indian Banks’ Association (IBA), after formulating a detailed model education loan scheme to provide financial support to deserving candidates, is now reviewing the current structure of education loans in the country. The association will give its report – which among other things recommends that banks be able to decide the cut-off marks for lending without any security – to the Reserve Bank of India (RBI) shortly.

Currently, banks offer education loans to students with Indian nationality in the age group of 16 to 35 years. For availing loans below Rs. 400,000, an applicant does not have to give any security and a third-party guarantor or security amount. The guarantor of the loan could be the applicant’s parent, working sibling or even spouse, if he or she is working, and in-laws or other close relatives.

Unlike home, auto or personal loans, those availing education loans do not have to do immediate repayments and can start after completing their course and securing a source of income. The moratorium period of the loan is the course period plus one year or six months after getting a job, whichever is earlier. Banks usually keep a window of five to seven years for repaying the loan and can give an extension of another two years if the borrower has a good repaying history. The interest rate varies from 12% to 16.50% for loans up to Rs. 400,000 for a period of seven years and between 12% to 17.5% for loans above Rs. 400,000 for a period of seven years.

The Indian Banks’ Association is looking at the the rate structure of the banks and is likely to suggest a longer time period to repay the loan for students who have had a brilliant academic record. Getting a loan might get tougher for those who do have a good academic record and pay a hefty amount to get admission for higher education, especially in professional courses. Analysts say with higher default rates, banks are now taking stringent measures to approve students loans and are doing proper due diligence for those loans that are taken to fund studies in capitation fee-based courses and institutions.

All banks charge a processing fee, which can vary between 0.5 % and 2.5 % of the total loan amount the student is applying for. The maximum loan amount a student an avail for studies in India is Rs. 1 million and Rs. 2 million for studying abroad. Some banks offer discounts on the interest rate for female students. One can claim income-tax deductions for repayment of an education loan for higher education of up to Rs. 40,000 per year under Section 80DD of the Income Tax Act.

Documentation for an education loan is simple: The bank or the financial institutions will require proof of identity, age and address. The student will have to furnish the admission letter of the institution and the fee structure of the particular course for each semester or annual charges.If the student is going abroad for the course for which he is seeking the loan, then he will have to give the passport details, GMAT or GRE score, total expenses for the course and all other travel documents to the bank. Ideally, the borrower should tie up the loan after getting the visa approval, which is the last hurdle for going abroad. In case of a co-applicant, the same documents plus income proof have to be given to the bank.

The government provides full interest subsidy during the period of moratorium on loans taken by students belonging to economically weaker sections from scheduled banks, where the annual parental income does not exceed Rs. 450,000 per year. The scheme is applicable for students pursuing technical and professional courses in India. After the period of moratorium is over, the interest on the outstanding loan amount is paid by the student. The interest subsidy under the scheme is available to students only once, either for the first undergraduate degree course or the postgraduate degree and diploma course, and will not be available to those who either discontinue the course midway or those who have been expelled from the institution on disciplinary or academic grounds.

Source: The Financial Express, May 17, 2011