Good education is the ultimate leveler and the most significant driver of wealth and prosperity. Data from the National Family Health Survey (NFHS) makes a solid case after surveying more than 600,000 Indian households in 2015-16.
As evident, there is a clear correlation between education and prosperity. People and institutions know that. Hence it shouldn’t come as a surprise that good education is a costly business. Many families hence, especially poor and middle-income households depend on banks to ensure their children can make their economic leap. Tuition fees, especially for professional colleges, can range in multiples of lakhs, making access to credit essential. Even though our banking system has lately not done any favours to this sector (considering the depressed monthly growth as shown in the below chart), education’s aspirational value and importance cannot be understated.
Thereby, I will now attempt to do a deep dive into how Education Loans work and how you as a consumer can benefit from them.
The Education Loan is a product which can help you fund your higher education in India or abroad. They form a part of Priority sector lending targets as set by the RBI. They can be used to finance a wide variety of courses, be it graduation, post-graduation, vocational courses, and other certificate courses. It is a loan Secured over guarantees and for larger amounts an asset of the Parent/Guardian (who acts as a co-borrower).
Maximum loan amount sanctioned depends on the type of educational institution the applicant is headed to. For premier institutions banks can sanction amounts up to INR40L. Banks often ask for co-applicants to fund part of their requirement through a down-payment (or “margin money” in banker parlance). There are specialist products available for studying abroad as well e.g. from financial institutions like HDFC Credila.
The loan is to be repaid as Equated Monthly Installments (EMIs) over the duration of up to 15 years (“loan period”). An EMI plan essentially spreads the total principal & interest due equally over the loan period and is chargeable on a monthly-basis.
What Interest Rate?
The applicable interest rate is set by the bank and is usually “Floating” in nature for Education Loans i.e. it changes throughout the loan period subject to RBI rates.
This interest rate depends on individual factors:
Macro factors primarily comprise the benchmark interest rate in the country which in turn influences all consumer facing interest rates, as explainer earlier.
You can check an online loan marketplace to get a sense of the applicable interest rates. They are usually expressed on an annualized basis.
The floating rate is usually structured as:
1-year MCLR + Spread
In layman terms, MCLR or “Marginal Cost of Funds Based Lending Rate” is the minimum allowed interest rate below which a scheduled commercial bank or NBFC is not allowed to lend. It is fixed by the Reserve Bank of India (RBI) and is closely tracking the short-term interest rates set by the Central Bank.
Floating interest rate, as the name suggests is not constant, and is “Floating” during the loan period depending on RBI’s monetary policy actions. They ensure borrowers can benefit from any rate reduction exercises by the RBI after they have already taken the loan. The additional Spread will include the margin that the lending bank would make.
There is usually no processing fee, no prepayment charges, or pre-closure charges for Education Loans. Loans for studying abroad are structured differently and may have certain processing charges etc.
Things to Watch