What is an Education Loan?
An Education loan is an amount borrowed from any financial institution to finance education expenses.
It is simply monetary assistance provided to students who wish to pursue higher education. It may be in the form of funds, scholarships, and rewards that are granted in cash that is to be repaid to the lender along with the interest.
Higher studies need high fees and other expenses, which are not much affordable by everyone. Banks provide education loans for higher studies including for Graduation, Post-Graduation, Diploma, Professional courses.
An education loan also gives deduction under Income Tax under section 80D.
Who is eligible for an Education Loan?
- Only people with Indian nationality.
- Should have secured admission from an approved university, degree college or even college for diploma.
- Should have completed 12th standard to be eligible for an undergraduate course and degree for a postgraduate course.
- Courses approved and were conducted by recognized universities and colleges recognized by UGC / Government / AICTE / AIBMS / CMR.
- Courses like ICWA, CA, CFA etc.
- Courses conducted by IIMs, IITs, IISc, XLRI, NIFT and NID.
- Any regular degree courses or even diploma courses on aeronautical, pilot training, shipping.
- Degree or diploma in nursing or any other discipline approved by the Director-General of Civil Aviation or Shipping or Indian Nursing Council or any other regulatory body as the case may be.
Documents required for applying for an Education Loan:
- KYC documents
- Admission letter of your college
- Fee structure
- 10th and 12th class mark sheets
- Results of your entrance exams
- Co-applicant KYC
- Income proof
- Additional documents in case any collateral required
Types of Education Loans
Education loans are many types depending based on location, based on course and based collateral. Let’s discuss them in detail.
Based on Course
- Undergraduate course
An undergraduate course loan is provided to students as financial aid to pursue their undergraduate degrees.
The term period of an undergraduate course will be generally a 3 to the 4-year long course with various subjects as specializations.
An undergraduate course is a basic education required by individuals to get a decent job and start their careers.
- Postgraduate course
Postgraduation is a course that is carried on by students that have completed their under-graduation.
It is generally a 2-year course with a specialization subject. Mostly, students pursue Post graduation in the same subject as their under graduation.
It helps in getting better knowledge in their area of interest.
- Career development loans
Many professionals who have work experience already may want to take a break from their career and better their skills through professional courses and training.
It helps them improve their employment prospects with better career opportunities.
Those individuals strive very hard to get into a reputed business school to improve their skills and get to great heights in their careers.
Based on Location
- Domestic education loan
A domestic education loan is given to students who would like to study in India. It will get approved only if the student is admitted into an Indian educational institution and meet all the required eligibility.
- Overseas education loan
Some students wish to pursue their education in a foreign educational institution. An overseas education loan helps students fulfil their dream.
It covers the expenses of airfare, accommodation, and tuition fees for students who wish to study abroad only if they satisfy the eligibility criteria.
Based on Collateral
- Loan against property, deposits, and securities
Some loans require collateral as a security for the loan amount. You can choose to pledge any sort of immovable assets like agricultural land, residential land, a flat, house and any other sort of immovable property.
Security can also be in the form of fixed deposits, gold deposits, recurring deposits, bonds, debentures and equity shares.
- Third-party guarantee
A guarantee letter has to be obtained by the student from an employee of a bank or any home bank as collateral to get an education loan.
Features of an Education Loan
The most common features of an education loan include:
A financial support
An education loan acts as financial support to students who wish to pursue their higher education in a recognized college or university.
It helps students to repay after the completion of their studies which reduces their burden of fee payment.
Covers various expenses
An education loan often covers expenses including tuition fees and other college-related expenses such as accommodation, exams and other miscellaneous expenses.
It helps the students in meeting the expenses of their stay which might be of greater cost and not affordable for every student.
Offered to study both domestically and abroad
This loan is offered to students who wish to study in India and also to those who wish to study abroad.
Though there is a variation in the credit limit in the case of domestic and abroad loans, it depends on the terms and conditions of the lending financial institution.
Secured and Unsecured loans
An education loan can be secured as well as unsecured depending on the amount of loan provided.
For a loan up to Rs. 4 lakhs, there is no collateral required by the banks. For loans above Rs. 4 lakhs and up to Rs. 7.5 lakhs, a third-party guarantee letter is required. And for a loan for an amount of Rs. 7.5 lakhs, collateral is asked.
Rate of Interest
The rate of interest of the loan is dependent on different factors like the loan tenure, the value of instalments, and the amount of loan taken.
You can negotiate the terms of the loan with your lender to reduce your interest rate. A small reduction in interest rate shows a greater difference in the total repayment amount.
Repayment tenure of a loan is the period of repayment of the total loan amount along with the agreed interest.
It depends on the amount of the loan and other terms of the loan agreement.
The repayment of the education loan principal amount starts after 2 years after completion of the education.
Income tax benefits
A deduction can be claimed under Section 80E of the Income Tax Act for an amount of the interest paid during one year.
It can be claimed for an amount of the entire interest paid without any restriction limit.
This deduction can be claimed for a maximum period of 8 years.
However, there is no provision in Income Tax to claim the principal amount of the loan.