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Fine points to look into when applying for student loans

Check repayment options, charges, interest rates, expenses covered before you take an education loan

Pooja Gawde

18 Oct 2007

Along with growing awareness about the importance of education to succeed in the knowledge economy, the cost of quality education too is growing fast. Parents too are willing to bear that extra cost to fund their child's higher education. education loan is the most cost effective means to fund your education if you are unable to get a full scholarship or do not have a generous aunt or uncle willing to sponsor your education.

Though most banks do provide educational loans, it is the public sector banks that are in the forefront in providing education loans.

In recent years, a large number of students, especially those pursuing professional courses in India or abroad, are availing of education loans.

According to latest data from the Reserve Bank of India, education loans disbursed by Indian banks rose 51% to Rs 15,000 crore for the financial year ending March 2007 from Rs 9,962 crore at the end of March 2006.

Following are a few points you need to check while applying for an education loan.

Repayment Options

Like for all other loans, you have to pay interest on education loan too. But unlike other loans, education loan provides the option of a moratorium period or a repayment holiday, which means, the borrower can suspend repayment of the loan till the education course for which the loan was taken is completed.

An education loan typically has three repayment options:

  • education loan with repayment moratorium. Many banks stipulate repayment within 1 year after completing the course or 6 months after getting a job, which ever is earlier.

  • Interest alone is paid during the period of course. After the course completion, you start paying the actual EMI (principle and interest)

  • You start repaying the loan through EMI immediately after loan disbursement, in which case you could get the loan at an interest rate lower by about 1 per cent.

The repayment conditions vary from bank to bank. So, talk with as many banks as possible to get the repayment option that suits your requirements.

Interest Rates

Interest rate on education loan is usually lower than a personal loan but slightly higher than a home loan.

Some banks offer a fixed rate of interest while others offer floating rate of interest on education loan. If the difference between fixed and floating rate is only about 1%, it is advisable to opt for fixed rate as education loans have shorter repayment tenures of 5-7 years. Many banks do not offer genuine fixed interest rate where the interest rate remains fixed for the full tenure of the loan. They, typically offer a fixed rate loan with a reset clause. This means the bank will have the right to revise interest rate after 2 or 3 years or whenever the bank feels it necessary to increase interest rate. So make sure that you take a genuine fixed rate loan. If it is a fixed rate with reset clause, a floating rate may be a better option.

Finally, the choice between a fixed and floating rate is dependent on the risk appetite of a loan taker. If you are totally risk averse and do not want to face the prospect of your EMI or repayment tenure shooting up in the event of an upward movement of interest rate, then you should definitely go for a genuine fixed rate education loan. However, if you strongly feel interest rate will go down during the loan tenure and is willing to take a risk on that count, you can perhaps opt for a floating rate loan.

Many banks, especially public sector ones, have special schemes for girl students. Some banks offer 1% lower interest rate for girl students. So check with your bank about al special schemes.

Processing Fee

Many banks do not charge a processing fee for education loan. So if your bank asks for a processing fee, you might be able to persuade the bank to waive it.

Prepayment Fee

Again, in almost all cases, banks allow foreclosure or pre-payment of the education loan without charging a penalty if the borrower makes the payment from his own sources. Banks charge a pre-payment penalty (usually up to 2 per cent of the loan amount) if the loan is transferred to another bank.

Expenses covered by education loan

The definition of expenses, which education loan covers differ from bank to bank. The amount of education loan sanctioned is in relation to the expenses that you will incur wile pursuing the course. The most common expenses covered include:

* Fees payable to college/school/hostel

* Examination/Library/Laboratory fees

* Purchase of Books/Uniforms

* Caution Deposit/Building Fund/Refundable Deposit

* Travel Expenses/Passage money for studies abroad

Besides the above mentioned, there may be other costs incurred for the completion of the course. Like the cost of instruments, lap-top and other aids necessary for completion of the course. Some banks like SBI also offer loans up to Rs 50,000 for two-wheelers as part of education loan. Banks provide about 80% to 90% of the cost of education as education loan. But the important factor to check here is the education expenses that are recognized by your lender.

If part of your education (course fee, for example) is funded through a scholarship, you could still get a loan to cover the balance expenditure. In such cases, most banks include the scholarship amount as part of the total cost of education. This way you could end up financing the entire cost of your education through loans and scholarships.

Lastly, it is always advisable to check with as many banks as possible before finalizing your lender to get the best deal.