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Education Loans - What to look for?

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An education loan is given by banks and other specialised financial institutions to students who wish to complete their graduation or post- graduation studies, either in India or abroad. These loans are generally offered by banks in the following slabs: Less than Rs. 4 lakhs, Between Rs. 4 lakhs and Rs. 7.5 lakhs and above Rs. 7.5 lakhs.  
Apart from funding education needs, an education loan will also give you tax benefits under Sec 80E. Interest on education loan taken by the borrower, parent or spouse from a recognized financial institution is fully tax deductible. The loan must be taken for a full-time course, which can either be a graduate course in engineering, medicine or management or post graduate course in engineering, medicine, management, applied sciences or pure sciences including mathematics and statistics. Not all banks offer education loans. Some banks let you borrow a personal loan, which funds your education and acts like an education loan. However, it is always better to take an education loan for funding your child’s education to avail the above-mentioned tax benefits.
Are you looking at taking an education loan for yourself, your spouse or your children? Here are a few important factors to be considered:

Interest rates: As in the case of any loan, the interest rate charged by the bank is the most important parameter to be considered. The interest rate usually differs according to the amount of loan needed and is quoted as a mark-up on the base rate of the bank. Rates are either fixed or floating in nature. Education loan come with a moratorium period for repayment of the principal amount. However, interest is required to be paid immediately on the disbursal of the loan. Some banks allow you to start payment of interest at the time of starting principal repayment. But remember that this will result in accumulation of interest from the date of disbursal which will increase your repayment burden. So always opt for payment of interest from the date of disbursal itself. It is also useful to understand from the bank if the interest is charged on a daily reducing balance or on a quarterly reducing balance.

Moratorium period: Banks wait for a year after the student completes the course or for 6 months after he gets a job, whichever is earlier, before demanding repayment of the principal of the loan. As mentioned earlier, find out from your bank when the interest repayment must begin, and if possible opt for a repayment from the date of disbursal itself.

Additional charges: Similar to any other loan, an education loan borrower needs to account for other charges like processing fees, documentation costs and administration costs as well.

Collateral: Loans above Rs. 4 lakhs require you to provide a collateral security or have a co-applicant for the loan, who will act as a guarantor. Banks accept fixed deposits, mutual fund units, cash, insurance policies or real estate as collateral security.

Margin amount: Borrowers are needed to fund anywhere between 5% and 20% of the loan amount, which is considered to be the margin. Banks thus lend only 80% to 95% of the total amount required, depending on the credit profile of the borrower.

Which bank should be chosen for an education loan?

As mentioned earlier, not all banks in India offer education loans. We have analysed education loans offered by six banks in India on the basis of various parameters. Despite offering good service levels, education loans from private banks like Axis Bank and ING Vysya Bank can be avoided due to the high interest rates charged. You will get better deals on interest rates from nationalized banks. You can consider education loans from Bank of India on the back of lower interest rate and more options to reduce your interest cost in the form of interest rate concessions. Similarly State Bank of India can be considered on the back of low interest rate. Although interest rates charged by Bank of Baroda and Punjab National Bank are higher than those charged by Bank of India and State Bank of India, they are lower than those charged by private banks. Hence you can consider options from these two banks as well.

A detailed comparison is available below, where we have analysed education loans offered by 6 banks in the slab between Rs. 4 lakhs and Rs. 7.5 lakhs for studies in India. Terms will vary for a higher or lower amount of loan and if you wish to take an education loan for studies abroad. If you prefer to download the excel fil. For more details, refer to individual bank websites. Kindly note that this analysis covers offerings from major banks only & this is not an all-product comprehensive comparison. The analysis is valid on the date being published.

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