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If you plan to take a loan for higher education, look for cheaper interest rate and lower fees
Adityendra Suman, 29, a Mumbai-based senior consultant at Dalberg, global development advisors, graduated from the Indian School of Business (ISB), Hyderabad, in 2016. He had taken a Rs23 lakh education loan from the Union Bank of India at 8.5% interest rate for a 15-year tenure, while the course fee was Rs25 lakh.

“I am paying a monthly instalment of Rs28,000, including the interest,” said Suman, adding he is not the only one. Pune-based Kinjal B, 32, a product manager at SminQ, a technology start-up, also took a Rs22 lakh loan for a post-graduation course at ISB in 2016. “I am paying Rs80,000-Rs1 lakh a month,” said Kinjal. Rising cost of higher education may need you to take an education loan. Here is all you need to know about it.

The loan

Major banks and non-banking finance companies offer education loans. However, loan components such as interest rate, amount, tenure and documentation process vary for each bank. The interest rate on education loans varies between 8.5% and 15% an annum. Usually, public sector banks offer cheaper loans.

For instance, the State Bank of India offers loan at 10.15%-10.90%, while Axis Bank Ltd gives an education loan at 13.50%-15% an annum. Some banks offer concession of 50 basis points (bps) for women students. One bps is one-hundreth of a percentage point. In cases where banks have tie-ups with certain institutions, you will get a differential pricing and usually it is lower. The education loan usually covers tuition fees, hostel charges, examination fees, cost of laptop, two-wheeler and travel cost.

You also have to pay a processing charge of up to 2% of the loan amount. Most banks fund 70%-95% of the loan amount. “You can get an education loan up to a maximum of ₹75 lakh, with maximum repayment period of up to 15 years,” said Gaurav Aggarwal, associate director, unsecured loans, Paisabazaar.com.

The bank does not transfer the loan amount to the student’s account, but gives it directly to the institution. Most public sector banks may ask you for collateral if the loan amount is bigger. Almost all banks will ask you for a guarantor or a co-applicant for the education loan to ensure if you are not able to repay the loan, there is someone else who will take care of it. Under section 80E of the Income Tax Act, you can claim tax deduction on the interest you pay on the education loan.

What should you do?

While Suman and Kinjal paid Rs25 lakh for the course at ISB in 2016, the fee for Abhishek Gopimohan Nair, 25, who joined ISB for 2018-19 is Rs32 lakh, up by Rs7 lakh in two years. If you are working and know that you want to go for higher studies, start saving money after factoring in the cost of the course and inflation.

If you have finished college and have started earning, you should not wait to repay the loan. This is usually the first loan most individuals take. It forms the basis of your credit history and all your future loans are dependent on how you repay this loan, as all financial institutions look at your previous record. If you have started repayment, don’t default. If you have taken a 15-year loan, try to repay it within 8 years to get the tax benefit.