For many, taking out a student loan to pursue higher education has always been a popular alternative. According to Crif High Mark, an RBI-approved credit bureau, 90% of education loans taken out come from public sector banks in value and volume. In addition, 20% of the loans are in the range of Rs 4-Rs 10 lakh.
When it comes to borrowing funds for higher education, you can choose between approaching a bank or a non-bank finance company (NBFC). Here are some factors that may differ between banks and NBFCs:
Will all courses be covered?
Banks receive an approved indicative list of courses. However, they may also consider courses other than the above offered by reputable institutions on the basis of employability and on a case-by-case basis.
In addition, the loans are of the categories below:
a. Loans to students admitted to top rated institutions
b. Loans to students admitted to other national institutions
vs. Loans for students wishing to study abroad. It is expected that depending on the perception of risk, the reputation of the institution and the employability of the student, banks will be able to fine-tune their terms and conditions of sanction based on these categories.
NBFCs like Avanse, Tata Capital, and HDFC Credila offer education loans. These NBFCs can be more flexible in offering loans with regard to course selection. NBFCs like Avanse offer loans for unconventional and professional courses such as new age technology courses, data science, photography, sports engineering, music, animation, painting, theater, dance, language, etc. , Avanse Financial Services ..
Avanse, for example, uses tools such as the “job predictability model” before lending. Gainda informs: “This model was developed to derive the future income of the student and takes into account critical factors such as entrance test score, academics (U / G results), work experience, the stream, course, and university the student has been admitted to and combines them with data on the work history of the university and the program. Therefore, Avanse assesses not only the student but also the colleges and courses for their potential employability before lending. ”
Are there any limits or restrictions on spending?
Banks and NBFCs cover most of the day-to-day expenses such as fees payable to university, travel expenses, bond, building fund deposit, purchase of books, equipment, purchase of computers, among other expenses.
However, in the case of banks, restrictions and caps could be put in place. For courses under management quotas, fees approved by the government approved regulatory body are taken into account. In addition, reasonable accommodation and board costs are taken into account in the event that the student chooses or is required to opt for outside accommodation. In addition, certain expenses could be considered provided that the amount does not exceed 10% of the total tuition fees for the entire course. In addition, several other expenses such as the cost of purchasing books, computers, study trips, etc. may be capped at 20 percent of the total tuition fee payable for course completion.
Interest rate
All bank loans, including education loans, taken out after April 1, 2016, are now tied to the bank’s marginal cost of funds (MCLR) based borrowing rate. Previously, they were tied to the bank’s base rate. However, NBFCs do not have the concept of MCLR and, therefore, may set their own rates based on competition and the cost of their funds.
The interest rates for educational loans are variable rates, not fixed rates. Typically, interest rates on educational loans are MCLR plus 1.5-2% or might be higher at some banks, varying depending on the loan amount and the course or institution. The one-year MCLR is currently around 8.5% for most banks, making the educational loan interest rate available between 8.50-11%, including the mark-up, if applicable. As for the rates of NBFC, it also varies among NBFCs. “The average interest rate for NBFC loans varies from 11% to 13% return on investment depending on the candidate’s profile, eligibility and other criteria which may vary from case to case,” explains Gainda.
Do you have to pay money on margin?
In some cases, you may be required to provide margin money (for loans over Rs 4 lakh) which can be up to 5% of the loan amount for courses in India and up to 15% for foreign universities. With few banks, there couldn’t be such a requirement for margin money and you can get 100% financing. With most NBFCs there is no margin requirement i.e. you can get 100% financing.
Parents’ proof of income
The loan is sanctioned as a co-borrower. The joint borrower should normally be the parent or guardian of the student borrower. In the case of a married person, the co-borrower can be the spouse or the parent or the in-laws.
In the case of banks, the loan is sanctioned on the basis of the co-obligation of the parents or the guardian as co-borrowers. However, in the case of NBFCs, Gainda says, “While we do parent / co-borrower creditworthiness, this is only one of many parameters taken into account in determining student loan eligibility. He adds: “Loans are sanctioned on the basis of the student’s employment prospects after the course ends and this is determined from a detailed analysis of the student’s academic and GRE scores (in case of ‘study abroad).”
Reimbursement options
Redemption options are more or less similar in banks and NBFCs. Typically, all education loan lenders offer several repayment options. One can consider a “IME leave” until the end of the course or an “intensive IME” which continues to increase over the years. The interest service during the study period and the moratorium period until the start of repayment is optional for students. If only interest was paid during the course, the accrued interest will be added to the principal amount borrowed when setting EMI for repayment.
Overall, obtaining a student loan from an NBFC would be beneficial if you are looking to fund a staggered course, especially since there may not be a cap or such restrictions and the total amount of expenditure can be funded. Additionally, for those looking for quick disbursement, NBFCs might be more suitable.
Things to watch out for when taking out a student loan
Here are a few factors to keep in mind when looking for a student loan:
Moratorium
What makes the student loan unique is the moratorium period which is equal to the duration of the course. During this period, different issuers may structure the loan differently. In some banks, there could be a full moratorium during the course (not even simple interest payable) or there could be a moratorium only on principal repayment, when only simple interest needs to be paid. With most banks, it can be extended up to 12 months so that a job can be found during this period. The extension of the repayment period (after moratorium) can be up to 15 years for all loans.
Maximum quantity
According to the guidelines of the Indian Banks Association, the maximum loan for study in India can be up to Rs 10 lakh, while for study abroad it can be up to Rs 20 lakh. The guidelines, however, allow banks to offer a higher amount based on course and institute. The amount of loan a bank would offer you would be based on two things – the course and the institute. Banks have their own list of institutes and have rated them based on their reputation. The first the institutes have a higher score, the loan amount given would be higher and the interest rate would be lower.
Guarantees
Depending on the amount of the loan, the bank may ask for a guarantee. For loans up to Rs 4 lakh, no collateral is required, what one needs is a co-borrower who can be the parent of the student. For an amount between Rs 4-7.5 lakh, most banks, in addition to making parents co-borrowers, can ask for a third party guarantee if the loan does not fall under the Credit Guarantee Fund Scheme for Education Loans ( CGFSEL). Under the CGFSEL, the maximum loan limit under this program is Rs 7.5 lakh without any collateral guarantee and third party guarantee
For a loan amount greater than Rs 7.5 lakh, banks would ask for collateral of equal value which could be title deeds, postal savings products, a life insurance policy, mutual funds. investment or mutual funds, bank deposits, among others. Guarantees are not essential in all cases. A bank may have a maximum limit of Rs 30 lakh but would ask for a guarantee if the loan offered is greater than Rs 20 lakh. Also, banks have different slabs for different institutes.
Based on the loan amount and also on the basis of the borrower’s credit history, NBFCs ask for collateral and are therefore more flexible on this parameter.
Tax advantages
To qualify for the Section 80E tax benefit, the loan must come from a licensed entity. Get it upfront from the bank or NBFC before going any further if you want tax benefits. The payment of simple interest, in all likelihood, will be made by the parent of the student who may benefit from a tax advantage on this payment of interest under section 80E.
Once the moratorium is over, the student can pay EMI to the bank. For the tax benefit, there is no cap on the amount of interest and such a deduction from income can be used for eight years, however, the repayment of principal does not enjoy any tax benefit. In addition, there may be times when simple interest payments are skipped or not paid to the bank. Otherwise, the 1% concession (most banks offer it) on the agreed interest rate cannot be used.
Processing fee
There might be a loan processing fee of 1 to 1.5 percent of the loan amount depending on Indian or foreign course. In addition, there might also be a prepayment charge, which not all banks or NBFC can charge.
What to do
Banks may make it compulsory for a student to take out a student loan to take out a life insurance policy. The loan is a liability and the co-borrower must therefore ensure insurance coverage equal to the loan amount, preferably through a pure term insurance plan.
Get an estimate from the bank or NBFC on the EMI which must be paid after the course ends. Ideally, the EMI should not exceed 25 percent of take home pay.
Efforts should be made to maintain a healthy repayment record to ensure a high credit score so that any future debt requirements are not affected. Use the financing option to achieve the career of your dreams, and in doing so, learn the nuances of money. After all, this will be the first loan as a student.
