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Are you one of those students who just got admitted to university and are looking for an education loan? Here’s what you should know about your creditworthiness, interest rates and where to apply for a loan.
Public Sector Banks (PSBs) are a dominant player in India’s student loan market. Data from RBI, provided in response to a query by Lok Sabha in March 2022, shows that PSBs account for over 91% of scheduled commercial bank lending to the education sector.
Many PSBs offer a range of educational loan programs, including those specifically designed for students entering major MBA, engineering, medical, and law schools. Depending on where an institution is in its preference list (e.g. AA, A, B or C), a bank is willing to lend up to a certain amount without physical collateral.
For example, the State Bank of India offers loans of up to €40 lakh at a floating rate of 7.5% with no collateral for those that make the ‘AA’ list of institutions including the IITs, IIMs, XLRI and BITS Pilani under the Scholar Loan scheme. Those not on any list can apply under the banks’ student loan program, but at a higher interest rate of 10.05% (variable rate). Including credits above €7.5 lakh require deposit of collateral.
Likewise, the Bank of Baroda offers student loans from top-rated institutions at variable interest rates starting at 7.95%. The maximum allowable loan amount is €40 lakh without collateral and up to €80 lakh otherwise, depending on top ranked colleges. Its Baroda Gyan program covers a range of courses and charges 10.20% (variable rate) for loans above that €4 lakhs. Higher credit also requires tangible security.“In accordance with regulatory guidelines, all new personal loans are linked to an external benchmark,” said HT Solanki, general manager and head mortgages & other retail investments, Bank of Baroda. All new student loans from banks are linked to the repo rate. With repo rate hikes expected, lending rates will only go north.
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Compared to public-sector banks, rates tend to be even higher for private-sector banks. “Private sector banks may be willing to provide unsecured education loans, which would make them more expensive,” says Adhil Shetty, CEO of Bankbazaar.com.
Vaibhav Singh, co-founder of Leap Finance, and Shetty highlight some key factors that banks consider when reviewing student loan applications. Aside from the institute’s reputation and accreditation, the process involves verifying the degree program – whether it is accredited or not; the security – whether the applicant is able to provide suitable and adequate security; and details about the co-borrower (parent/guardian) – their employment history and creditworthiness. An education loan requires a co-borrower, who may be a parent/guardian of the applicant. If the student fails to repay the loan, liability then passes to the co-borrower.
According to Solanki, no distinction is made between employed and self-employed parents, and the loan approval depends on the situation.
Alternatives to banks
If you cannot get a bank loan, an educational loan-focused non-banking finance company (NBFC) is an alternative. However, the loans will likely come with higher costs. “Students going to top colleges around the world can easily get loans from any financial institution. As such, we are strategically focused on the next tier of institutions,” said Amit Yadav, Chief Strategy Officer and Chief Business Officer Digital Business, Avanse Financial Services. Avanse has no cap on the maximum loan amount and offers multiple loan repayment options. Avanse offers loans at the base rate (currently 13.15%) plus the spread.
Similarly, HDFC also offers Credila Financial Services flexibilities such as no loan amount cap, no margin (a certain percentage of the cost of education that a borrower must fund themselves), and fractional collateral.
However, banks can score better than non-bank lenders in one important respect. Under Section 80E of the IT Act, interest on an education loan – taken for yourself, the child, spouse or someone you are the legal guardian of – is deductible for eight fiscal years. According to Shubham Jain, Manager, Nangia Anderson LLP, an interest deduction can only be claimed for educational loans drawn by banks and notified bodies.
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