An Indian student's cheat sheet to bagging education loan

Public sector banks (PSBs) are a dominant player in the Indian education loan market. Data from the RBI, furnished in response to a Lok Sabha question in March 2022, shows that PSBs hold over 91% share in lending by scheduled commercial banks to the education sector.

Interest rates, collateral

Many PSBs offer a range of education loan schemes including those specifically targeted at students who get admissions in prominent MBA, engineering, medical and law colleges. Depending on where an institute figures in its preference lists (such as AA, A, B or C, for instance), a bank will be willing to extend a loan of up to a certain amount without tangible collateral.

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For example, State Bank of India provides loans of up to ₹40 lakh at a floating rate of 7.5%, without collateral to those who make it to its ‘AA’ list of institutes including the IITs, IIMs, XLRI and BITS Pilani under its Scholar Loan scheme. Those not covered by any list can apply under the banks’ Student Loan scheme, albeit at a higher 10.05% (floating interest rate). Under the latter, loans above ₹7.5 lakh require collateral to be furnished.

Likewise, Bank of Baroda offers loans to students of premier institutes starting at a floating rate of 7.95%. The maximum permissible loan amount is ₹40 lakh without collateral and up to ₹80 lakh otherwise, depending on the highest-ranked colleges. Its Baroda Gyan scheme covers a range of courses and charges 10.20% (floating rate) for loans over ₹4 lakh. Higher loans require a tangible collateral too.

“As per regulatory guidelines, all new retail loans are linked to an external benchmark," explains HT Solanki, general manager and head-mortgages & other retail assets, Bank of Baroda. All new education loans by banks are linked to the repo rate. With expected repo rate hikes, loan rates will only head northwards.

Compared to PSBs, rates at private sector banks tend to be higher still. “Private sector banks may be amenable to issue collateral-free education loans, which would make them more expensive," says Adhil Shetty, CEO, Bankbazaar.com.

Eligibility

Vaibhav Singh, co-founder, Leap Finance, and Shetty highlight some of key factors that banks consider while reviewing applications for education loans. Apart from the reputation and accreditation of the institute, the process involves reviewing the course – whether it is accredited or not; the collateral —whether the applicant has the ability to provide suitable and adequate collateral; and details about the co-borrower (parent / guardian)—their employment history and credit score. An education loan requires a co-borrower which can be the applicant’s parent / guardian. In case the student fails to repay the loan, the liability then vests with the co-borrower.

According to Solanki, no distinction is made between parents who are salaried and those self-employed, and the loan approval depends on the merits of each case.

Alternatives to banks

If you are unable to get a bank loan, an education loan-focused non-banking finance company (NBFC) is an alternative. The loans, however, are likely to come at a higher cost. “Students going to top colleges worldwide can easily access credit from any financial institution. Hence, we strategically focus on the next level of institutions," says Amit Yadav, chief strategy officer and chief business officer-digital business, Avanse Financial Services. Avanse does not have a cap on the maximum loan amount, and provides multiple loan repayment options. Avanse offers loans at base rate (13.15% currently) plus spread.

Similarly, HDFC Credila Financial Services, too, provides flexibilities like, no upper limit on loan amount, no margin money (certain percentage of the cost of education that a borrower must fund on his own), and partial collateral.

That said, banks may score over non-bank lenders on one key aspect. Under Section 80E of the IT Act, the interest paid on an education loan - taken for self, child, spouse or for someone who you are the legal guardian to- can be claimed as deduction for eight financial years. According to Shubham Jain, Manager, Nangia Anderson LLP, deduction of interest can be claimed only on education loans availed from banks and notified entities.

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