In India where should you take your education loan from?

Owing to the rising cost of education, the dream of getting admission to a foreign university or even studying at a reputed institution within the country can become financially difficult for many. If you are worried about how to finance your higher studies, an education loan can come to your rescue. One should keep in mind that while public sector banks typically offer a lower rate of interest, private lenders score on convenience and quick disbursal. So, which one should you go for? Let’s understand how to choose a lender while opting for an education loan.

Many loan options for professional job-oriented courses
To get an education loan, you first need to secure admission to an accredited college or university. Most banks typically offer educational loans for long-term job-oriented professional and technical courses at the undergraduate and postgraduate levels offered by reputed universities.

First, you need to check with the lender if the course or university you are planning to attend is on its approved list. “Most lenders have a list of educational institutions and courses for which they provide education loans,” said Adhil Shetty, chief executive officer, of a Bank. Banks usually provide loans for most domestic courses recognized by UGC/AICTE, or the government. If you are planning to study abroad, you can easily get loans for undergraduate and postgraduate courses at well-known universities. An education loan can also be availed for diploma courses considering they are duly recognised by regulatory bodies in the country or abroad for employment.

Challenging to get loans for these courses
If you are considering a non-technical, nonprofessional course, like music, fine art, photography, culinary management, or theatre, it would be difficult to secure a loan from a reputed public sector lender. “Unconventional courses are less likely to find good deals from public sector banks as there will always be a reasonable doubt, for the lender, about the overall efficacy of the course. Private sector banks, on the other hand, would be more than happy to give you an education loan on such courses,” said Raj Khosla Founder & Managing Director – of MyMoney

“If the university or college and the particular course chosen by the student is not part of the list approved by the bank, then getting a loan would be tough,” Shetty explained. You may check with private sector banks and non-banking finance companies (NBFCs) that may offer loans for such offbeat courses.

 

An interest rate of your education loan
On education loans, public sector banks charge much lower interest rates than private banks. For instance, State Bank of India (SBI) interest rates on education loans start from 8.2 percent. For Union Bank of India, the interest rate for an education loan starts from 8.85 percent. Punjab National Bank’s education loan starts from an interest rate of 8.55 percent.

Public sector banks offer education loans at lower interest rates than private sector banks. Further, female students can avail of a concession of 0.50 percent to 1 percent in certain banks,” said Khoshla.

Education loan starts from 9.85 percent at ICICI Bank, 9.55 percent at HDFC Bank, 13.7 percent at Axis Bank. “Private sector banks typically charge higher interest rates on education loans, which can result in higher overall loan repayment amounts,” said Khoshla

Do remember that a bank does not charge a flat rate to all borrowers. The interest rate of your education loan will depend on many factors such as your financial status, credit score, the reputation of the institute where you are taking admission, employment potential of the course, and so on.

Keep an eye out for the one-time processing fee that banks charge while approving the education loan. It could go up to 1.5 percent of the loan amount in public sector banks.

“Private banks can charge up to 2 percent of the loan amount. The processing fee charged by government banks is generally low compared to the private sector banks as they do not promote selling through agents,” said Khosla.

PSU banks will give loans at low interest rates, however, they generally have a cap on the loan amount that they can offer. Private Banks, with slightly higher rates, generally are open to lending larger amounts depending on the course-college combination and their assessment of the employability of the applicant post-course completion.

Margin money and collateral for high-value loan
While the interest rate of education loans can be lower in public sector banks, they typically ask for collateral for a loan amount above Rs 7.5 lakh. On the other hand, some private sector lenders provide education loans of up to Rs 35-40 lakh without any collateral.

In some cases, the public sector bank may ask you to furnish margin money for loans above Rs 4 lakh. Margin money is the portion of the loan that a student has to contribute while availing of an education loan. It could be up to 5 percent of the loan amount for courses in India and go up to 15 percent for studying abroad. However, there could be some banks that do not require margin money and you can get 100 percent funding. Usually, private banks do not ask for margin money while financing education loans for studying abroad, said experts.

If a student plans to pursue an overseas course or requires an unsecured loan, private banks would be more suitable for them, said Nilanjan Chattoraj, Head – Credit & Product – Education Loans, InCred Finance.

EMI holiday and prepayment charges
Public sector banks usually offer a moratorium period and a grace period or EMI holiday for education loans. The moratorium could be for the period of study or can be extended for a year after finishing the course. “While you get a payment-free moratorium period in government banks, private lenders take partial or full interest on the disbursed amount during the moratorium period,” Khoshla said. You must pick a lender which allows some flexibility. However, you should start repaying as early as possible to reduce the burden.

You should also find out if the lender will charge pre-payment for the loan.

“There is a huge advantage when it comes to prepayment charges, as public sector banks do not levy any prepayment charges. The borrower can repay the complete loan whenever he/she arranges it,” Khosla added. On the other hand, private banks generally charge 2 percent of the remaining loan amount as a prepayment charge as they do not want to lose out on the interest they are earning, he mentioned. Further, the borrower usually cannot repay the loan before completing six months of his/her loan in private banks, he said.

Processing time: How long bank will take to approve your loan?
The biggest challenge with the public sector banks is the processing time. Even if you have all the documents in place, public sector banks can take over three to four weeks to approve an education loan.

“Private banks have a simplified procedure to handle the approvals and are renowned for quicker processing times. They typically offer flexible loan terms. On occasion, they also provide tailored loan solutions to meet the needs of the students after carefully assessing their financial condition and repayment habits,” said Amit Singh, Founder of UniCreds, an extended arm of UniScholars.

Cost of an education loan
	GOVT BANK	PRIVATE SECTOR BANK
Loan Amount (Rs)	35,00,000	35,00,000
First-year installment (Rs)	17,50,000	17,50,000
Second-year installment (Rs)	17,50,000	17,50,000
Collateral	YES	Depends on the bank
Interest (%)	9	12
Repayment tenure (years)	10	10
EMI holiday (years)	2.6	2.6
Interest paid during EMI holiday (Rs)	0	8,40,000*
Interest accrued during EMI holiday (Rs)	6,30,000	0
Outstanding amount (Principle + Interest)	4,130,000	35,00,000
EMI (Rs)	52,317	50,215
Total interest (Rs) paid through EMI	21,48,051	25,25,780
Total amount paid (Rs) through EMI	62,78,051	60,25,780
One-time processing fee (Rs)	17,500	35,000
Total outgo (Rs)**	62,95,551	69,00,780
We assumed the whole loan amount is disbursed in two equal parts at the beginning of each year in two years, * 1% monthly simple interest, **including interest paid during EMI holiday

 

Do the math
Do keep in mind that education loans usually cover the full course fee payable to the university. It also includes other expenses such as hostel fees, purchase of books and equipment such as a laptop or camera, study tours, and projects. Usually, banks provide 15-20 percent of the tuition fee for other expenses.

Before approaching a bank, you must calculate how much money you may need, including travel and living expenses. For instance, if your course fee is Rs 30 lakh, lenders will give an additional Rs 6 lakh to meet other expenses. Foreign universities usually provide a break-up of costs students can incur.

Before approaching a bank, you must calculate how much money you may need, including travel and living expenses. For instance, if your course fee is Rs 30 lakh, lenders will give an additional Rs 6 lakh to meet other expenses. Foreign universities usually provide a break-up of costs students can incur.

Final verdict
While PSU banks will give loans at lower interest rates, they generally have a cap on the loan amount that they can offer. Private banks, with slightly higher rates, generally are open to lending larger amounts depending on the course-college combination and their assessment of the employability of the applicant post-course completion, said Dev Ashish, SEBI Registered Investment Advisor (RIA) and Founder, StableInvestor.

“While private sector banks are ideal for students looking for quick, personalized loans with digital access to loan information, public sector banks are the best options for students willing to choose loans with lengthy repayment and waiting periods for approvals,” said Singh.

“Public sector banks (PSU) offer the advantage of lower interest rates, which is a major attraction for borrowers. However, PSU banks have a few disadvantages, including a very long turnaround time (TAT) for loan processing, a requirement for collateral or mortgage, limited unsecured options, and opacity in their processes and services. On the other hand, private lenders may charge somewhat higher interest rates than PSU banks, but they offer distinct advantages such as student-friendly products and processes, a faster and more digitally optimized experience, higher unsecured loan options, and greater transparency in their services.

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