Education Loans Explained: The Ultimate Guide

Welcome to our comprehensive guide on educational loans. In this guide, we will cover all the necessary information you need to know about educational loans, including the types of lenders, collateral and non-collateral loans, co-signers, and interest rates.

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Lenders

Lenders are the persons who give us loans. Three types of lenders will provide us with loans. First, Public Banks. E.g., State Bank Of India(SBI). Second, Private Banks. E.g., HDFC, ICICI, Axis Bank, etc. Finally, NBFCs. It means Non-Banking Financial Companies. These companies are not banks, but they give us loans. For example, Prodigy Finance. It is one of the most famous NBFCs.

To give an overview for you, I will use some examples. For example, SBI is a public bank. HDFC is a private bank. Prodigy finance can be considered in NBFCs. In this video, I will call all three types of banks as banks. Our educational loan is not just for our tuition fee. Some banks will sanction our loan by including our living expenses and other charges like a laptop, flight tickets, etc.

Collateral / Non-Collateral

These are also called secured/unsecured loans. Collateral means surety. Non-collateral means having no surety. If we take a loan by putting/giving any land documents (or) house documents, Gold, etc. comes under collateral loans. In non-collateral loans, we take loans by not putting any of these.

Widely Accepted Collateral: Immovable Property, Liquid Securities, Houses (Residential), Fixed Deposits, Apartments/flats, Insurance Policies & ULIPs, Lands (Non-Agricultural), Government Bands, Commercial Properties, Mutual Funds, etc.

If we take a collateral loan, First, we will submit the required documents. After paying the entire loan, they will return our records. We can’t sell the collateral that we put for surety until the loan is not completed. For example, SBI will give up to 7.5 lakhs for a non-collateral loan. Those 7.5 lakhs are not enough for our education. We should take a collateral loan if we want a considerable amount. In HDFC, there is a loan scheme called credible. In HDFC, without collateral, they gave up to 70 - 80 lakhs. If we talk about the prodigy, there is no such thing as collateral. Without any surety, they will give up to one crore. The interest rates will be high because we don’t have any collateral. If we take any collateral loan, the interest rates will be less.

Co-Signer

This co-signer is also called a Co-Applicant, or surety. The person who will keep signing for surety is known as a co-signer. Usually, In most cases, our parents/guardians will be co-signers. The role of this co-signer is like a trust for banks. For example, If the student doesn’t repay the loan, the co-signer will repay. For instance, Co-Signer is mandatory for both collateral and non-collateral loans. In HDFC credilla, a co-signer is also compulsory for collateral and non-collateral loans. In prodigy finance, there is no need for a co-signer.

Interest Rates

I hope you all know the interest rate. The amount we take as a loan is called the principal amount. And banks will put some interest on this principal amount. In HDFC, the interest rates are around 8%-11%. In HDFC credible, It will be 11.5%-13%. In prodigy finance, it will be 8-10%. If we observe as we put collateral in SBI, the interest rates are low. In HDFC credilla, we can get loans without collateral, so the interest rate is high. If we put any collateral in HDFC, the interest rates will decrease, but they will be increased when compared to SBI. If you think there is only 8-10% in prodigy finance, and if you chill, there is another loophole. This prodigy will give loans in US dollars, not in Indian Rupees. So, we should repay the loan in US dollars only. Suppose the dollar price is 75 rupees when you take the loan. The dollar rate will gradually increase. After two years, it might grow to 78 or 79 or anything. So, we will pay a considerable amount in Indian rupees. In SBI and HDFC, we will take the loan in Indian rupees. So, after two years also, we will pay the loan in Indian rupees only. In Prodigy finance, you will take in US dollars, so you must also pay the interest and the dollar increment. So, the amount is high. The interest rate can increase up to 13-14% when the time we repay the loan.

In Private Banks, the process is more straightforward when compared to public banks like SBI. In SBI, the process is slightly complex, but you can consider this due to low-interest rates. Banks won’t provide loans for the same interest rates to all. This interest will vary for every person. These interest rates will depend on your profile; Like is there any surety? Income of co-signer, IELTS Score, GRE Score, University Rankings, etc. They will evaluate these multiple factors to give a loan. There is a website called webometrics.info. Most of the banks will check university rankings on this site only. Interest rate is the most critical factor. For example, one bank gives us a 10% interest rate, and another gives us an 11% interest rate. This 1% can make/cost you lakhs in the long term. So, if you take low interest rated loan, there will not be a huge difference. Everything will matter in the rate of interest. It doesn't matter much if you pay the loan after 3-4 years. It will matter if it takes a long time to repay. If you take more time, then you will lose more amount.

Moratorium Period

It is also called as Grace Period. As we are taking an educational loan, there is an advantage. In education time, we need help to repay the loan. We can start repaying our loan after the completion of our education.

Simple Interest / Compound interest

I hope you all know the concept of simple interest and compound interest. They will only calculate the principal/loan amount in simple interest. But in Compound Interest, first, they will put the interest on the principal amount; after that, they will add the interest for the whole principal amount and the interest amount. SBI will charge simple interest when you are in a moratorium period. Once your moratorium period is completed, they will start charging compound interest. HDFC will charge compound interest for both the moratorium and non-moratorium periods. In prodigy finance, simple and compound interest will be combined.

Fixed Interest Rate / Floating Interest Rate

Fixed interest rates won’t change day by day. The bank will charge that interest rate only when you take a loan. If the interest rate changes over time, it will be a Floating interest rate. In a Floating Interest Rate, The interest rate will fluctuate based on the market rate. SBI and HDFC will follow Fixed interest rates, and Prodigy Finance will follow both Fixed and Floating interest rates combined.

Margin Amount

For example, Margin amount means, suppose banks will give 80% of the amount in i-20, and the remaining 20% should be bear by us. For clarity, Let’s say you take a 60 lakhs loan; in case the margin amount is 25%, banks will give up to 45 lakhs, and the remaining 15 lakhs should be bear by us. The margin rate is like a trust for banks. But the foremost important thing is that, as you are also paying some fees on your own first, you will feel responsible for your study.

Loan Disbursement

Some banks will directly transfer the amount to your bank account after you have taken the loan. Some banks don’t send the amount directly even after sanctioning the loan. We should raise a request one week before for our tuition fee; then, they will send the amount to your bank account. And some banks will directly send it to the university without sending it to you. If your bank directly sends the amount to your university, ask your bank for some living expenses. After that, you can contact your university and take your extra amount.

Reimbursement Charges Limit

As I said, banks will give loans for our tuition fees, expenses, etc. There will be a cutoff for each category. Even a 60-70 lakhs loan is sanctioned; if the tuition fee cutoff is 25%, they won’t give your loan more.

Loan Tenure

We will also call this a loan period. This means for how long we are taking this loan. Usually, people will choose 7-10 years as loan tenure. During this period, we will repay the amount in installments. The moratorium period will also come in this loan period. But there is no need to pay the loan in the moratorium period. Once the moratorium period is completed, we can deliver the loan in installments. It doesn’t take much time to repay the loan, but we will take a long tenure period for safety. Maximum, we can clear the loan 4-5 years after getting the job. If we have money, we can pay the whole amount simultaneously.

Pre-closure Penalties

Some banks will ask you to pay the penalties if you repay the loan before the tenure period. Leading banks won’t have these penalties. But some banks will play some tricks because their interests are going out if you pre-close your loan.

Processing Fee

This is also called an Admin Fee. This fee is for processing your loan. This processing fee is not a commission. After you apply for a loan, they will process the application. So, they will charge for the processing of the application. This processing fee may vary from 1-5% of your loan amount. SBI has a fixed processing fee. It will be around 10,000 - 11,000. Prodigy Finance will take 5%.

Income Tax Benefits

If we take a loan, we can avail of income tax benefits by showing it. The student can’t help with these benefits as he will be in the USA. But your co-signer can avail of these tax benefits. You will not get any help in prodigy finance as no so-signer exists.

Disclaimer!

The numbers I said here are just for representation. Other banks can also have offers and benefits. I know these banks, so I explained this to you as an example.

Conclusion

In conclusion, an educational loan can be a significant financial aid for students who wish to pursue higher education but may need more funds. Considering all the factors mentioned above is crucial before selecting a lender and applying for a loan. We must carefully assess our financial situation and choose a repayment period and interest rate that is feasible for us. Additionally, we should ensure that we meet the lender's eligibility criteria to increase the chances of our loan application being approved.