Education is not affordable. This is a simple truth that cannot be contested. The cost of education in India has risen exponentially; it rises further as you move up the rungs of the education ladder.
The cost of education in foreign universities has registered an even greater increase. Taking the example of US universities, the cost of education for out-of-state and international students at public National universities has risen 165 percent in the last 20 years. Education loans are a crucial component when it comes to financing education.
Availing of an education loan in itself is not a straight road. The finer points of an education loan, such as interest rates, processing fees, loan tenure, decide the actual cost of education for students. Moreover, it is not only banks that lend money to finance education; several Non-Banking Finance Companies (NBFCs) have sprung up that offer easy financing options. So, which direction should a student choose? Take an education loan from a nationalized bank, which takes up to a month to grant a loan. Or opt for a speedy road to finance education with NBFCs? The answer is not that simple but let’s deconstruct the education loans offered by them to understand better.
Banks were the leading lenders in the market for the longest time financing education to top universities and colleges and later expanded to the study abroad segment. They offer various education loan products to study in India with 100 percent financing, zero processing fees, with tangible security as collateral. The IBA ‘Model Education Loan Scheme’ mandates Public banks to offer unsecured loans only up to the amount of Rs 7.5 lakh.
For a loan above this amount, borrowers will have to pledge collateral. Banks make an exception to this Rs 7.5 lakh limit for a set of colleges that are in their preferred list of colleges. Besides this, it is mandatory to pledge collateral for a secured loan, with a value that is typically equal to or more than the required loan amount. Pledging collateral has multiple benefits like a higher loan amount limit, a lower rate of interest, and lower processing fees.
With collateral, students can borrow up to Rs 1.5 crore at an interest rate of 8.8 percent for abroad education. There is an additional 0.5 percent concession awarded to women applicants. The maximum loan tenure for secured education loans is 15 years.
The banks covered the major education loan market though with certain shortcomings in the process. However, they missed out on the growing study abroad segment, upskilling/vocational courses, and other non-traditional programs. Banks eventually segued into the study abroad space after dominating the domestic market for a long time. Interestingly, major NBFCs like Avanse and Credila started their journey from the study abroad space and subsequently expanded to the domestic education loan market.
NBFCs offered both secured and unsecured education loans to students for every course and program including vocational training, diplomas, and executive programs. While banks emerged as the leading lenders of secured education loans, NBFCs came to be known for processing speed and product structuring.
Factors taken into consideration while evaluating the loan application for an unsecured education loan are the students’ profile, the ranking of the course and the college, the co-applicant's financial status, the credit history of the applicant and the co-applicant, and the future earning potential of the student. Out of all the factors, the income of the co-applicant is given more importance because the co-borrower has to make interest-only payments during the study period. The interest rate offered to students is based on the risk the lender is willing to take, meaning the interest rate will vary depending on the profile of the applicant and the co-applicant. Students can expect a higher rate of interest starting from 10 percent, while the repayment period for the loan is 10 years.
Students unable to pledge collateral or arrange a co-applicant can apply for an education loan from international lenders.
The difference between the education loan process of a bank and the NBFC lies in the ease of the application process. There are definite benefits of an education loan from a bank, such as low cost and tax benefits, but requires equal effort from the applicant to get the loan approved. There is a long list of documents required, the application moves at a slower pace and can take up to a month to get approved. NBFCs, on the other hand, offer flexible loan products but at a high cost. Education loans from banks typically have zero or low processing fees, while the NBFCs charge 1.5 percent to 2 percent of the loan amount as processing fees irrespective of the country.
Processing fees of various lenders for the study abroad education loans -
|State Bank of India||Rs. 10,000 (Non-refundable)|
|Bank of Baroda||Rs. 10,000 (refundable)|
|Axis Bank||Rs. 15,000 (Refundable)|
|NBFCs||1.5% to 2% of the loan amount (Non-refundable)|
The processing time of an education loan is another aspect that differs in banks and NBFCs. Banks can take up to a month to issue the sanction letter to the borrower as they evaluate the collateral, the students’, and the guarantor’s profile. NBFCs, on the other hand, excel at working under shorter timelines with loan decisions being communicated in as low as 3-4 days.
This may be the lone negative point in the functionality of an education loan from a bank. The borrowers, apart from lowered rate of interest and higher loan amount limit, also enjoy income tax exemption under Section 80E of the Income Tax Act of India. The borrower and the co-applicant are automatically eligible for the tax exemption on taking the education loan from the bank, that is, the interest that you pay on the loan will fall under deductions that can be claimed by the applicant/co-applicant. This is a feature missing from the education loan from most of the NBFCs.
Education loans, either from a bank or an NBFC, can be viewed as an investment for a brighter future. It enables the student to pursue higher education, become employable, and ultimately live a better life. While it is advisable to take a loan from a public sector bank given the low cost, one might look at private sector banks or NBFCs that offer quick service and a wider range of loan products, albeit at a higher price.
The author, Ankit Mehra, is Founder and CEO at GyanDhan. The views expressed are personal