Educational loans are loans offered to students to enable them to meet the costs of professional/vocational studies and repay them after the student completes his course and/or becomes financially independent.
High cost of education is making it hard for students to chase their dreams for higher studies in reputed colleges, both in India and in foreign universities.
Further due to high inflation, tuition fees and other education related expenses are continuously on a rise and have emerged as big deterrents for students in achieving their aspirations. If high cost of education has been a concern for aspiring students and their parents, then one should evaluate the option of availing an education loan which is currently offered by all reputed banks and NBFCs in India.
In order to make educational loans affordable for each and every student, many tax benefits and an attractive government interest subsidy scheme are available in India. Some of the key benefits are:
Interest paid on education loan for study can be claimed as deduction under Section 80E of the Income Tax Act, 1961. Interest paid on education loan for study can be claimed as deduction under Section 80E of the Income Tax Act, 1961. The entire interest paid (without any limit) on the education loan is tax-deductible under Section 80E of the Income Tax Act. Tax deduction reduces the effective rate of interest on education loan by almost 250-400 basis point, thus bringing the effective interest rate to as low as 9.5 %
Central Government of India has launched an Interest Rate Subsidy scheme for Education Loan for students who belong to Economically Weaker Sections (EWS) of the society. Under this scheme, the Government of India shall provide full interest subsidy during the period of moratorium which is defined as Course Period plus one year or six months after getting job. The student shall need to furnish documentary evidence the gross annual income of the family of the student together from all sources does not exceed Rs 4.5 lakh. The interest subsidy under the Scheme is available to the eligible students only once during his lifetime. The subsidy is available for first undergraduate degree course or first post graduate degrees diploma courses in lndia and is also admissible for integrated courses (graduate + post graduate). Canara Bank is the nodal bank for implementing the scheme. The Scheme is applicable from the academic year 2009-10 starting 1st April, 2009 and hence, the loan amount taken starting from the Academic Year 2009-10 are covered under the Interest Subsidy Scheme.
RBI has classified education loans as priority sector lending under which banks are compulsorily required to lend 40% of their incremental advances to sectors under priority sector lending. Banks are under a constant pressure to meet their priority sector lending targets and hence, typically charge a relatively lower interest rate on these loans as compared to other commercial loans. This acts as an indirect subsidy to make student loans available at cheaper rates of interest.
Key benefits and advantages on student loans
Indian Banking Association (IBA) has issued a model Educational Scheme which provides an outline of education loan schemes that banks in India can follow. Based on government’s directive most of the public sector banks in India, offer the model educational loan scheme. The model scheme provides guidelines to the banks on determining the eligibility of student borrowers, educational courses to be covered, cost heads that can be financed under education loan, moratorium period, repayment and prepayment terms, margin requirements, limits for margin requirements and collateral free loans or loans based on third party guarantees. Most of the public sector banks or government banks follow the model scheme. However, a few of the leading banks such as State Bank of India (SBI), HDFC Credila and Avanse DHFL have introduced several other customer friendly features such as collateral free loans of higher amount, lesser margin requirements and flexible EMI schemes.
Education loan can be availed at attractive interest rates of as low as 11.25 %, with effective interest rate of as low as 9.5 % (taking into account the impact of tax benefit available on education loan)
Educational loan comes with a moratorium period of typically one year after the course is completed or when the student joins a job, whichever is earlier. EMI payment begins only after completing the educational program. Hence, this means low financial burden for the student and his/her family for the period when the student is studying and is unemployed and non-earning.
Female students get additional benefits as they are eligible for upto 0.50% rebate on rate of interest on education loan compared to male students.
Many banks do not ask for a collateral security for loans of up to a particular amount, thus further reducing the pressure on student borrowers to mortgage a property. Some large banks such as SBI and HDFC Credila are even willing to lend up to Rs 30 lakh without any collateral for admissions to reputed institutions such as IITs/IIMs etc.
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Nitish kumar launches a student credit card scheme for the students who have passed senior secondary education and wish to persue higher studies. This will be treated as Education Loan. The withdrawing limit will be upto 4 lakhs where interest rate will be born by the Bihar government.
The state cabinet gave its nod to Student Credit Card Scheme. Under this scheme, the 12th passout students can take education loans of up to Rs 4 lakh for pursuing higher education. The government will act as guarantor and provide support to the students to get loan from banks. The students who take admission to any recognised institution will be eligible for loan, irrespective of their financial background. The Bihar government will sign a memorandum of understanding this month with the banks and the interest rate will be kept at 2 per cent above the benchmark rate.
State Bank of India has increased its limit for overseas education loans to Rs. 1.5 crore from Rs. 30 lakh currently. SBI is also increasing loan amount of government guarantee loan to Rs. 7.5 lakh from Rs. 4 lakh. SBI is an improving demand for education loans since it combined with the government Vidya Lakshmi portal, and 10 percent of its education loan applications are already through the portal. The current education loan book of SBI stands at Rs. 15,000 crore and it is expecting a growth of 15 per cent and 20 per cent in number of loans disbursements respectively
State Bank of India, Bank of Maharashtra have reduced interest rates on educational loans by about 25 basis points over the past weeks. This move has brought the interest rates down to 2008 levels. Depending on the tenure and the loan size , the new interest rates for loans are between 10.8% and 12.2% at public sector banks. Banks had charged interest rates higher than 13% for the previous year.
Top private Banks, ICICI Bank and HDFC Bank have reduced their interest rate on educational loans by nearly 200 bps since June 1, to between 13% and 17%, with loans being half a percentage point less for girl students.
Economically weaker students aspiring to pursue professional and technical education can now avail study loan up to Rs 10 lakh at one per cent interest rate. The state government will create a corpus of Rs 500 crore from its own resources for the subsidised loan scheme christened Kalinga Sikshya Sathi Yojana (KSSY). The subsidized higher education loan was part of BJD election manifesto before the simultaneous Lok Sabha and state assembly elections.
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