How does an education loan work?

Posted by neha sharma on May 10th, 2019

An education loan or student loans is a loan given out to meet the cost of education for a student. In most cases, these types of loans finance post graduate education both in India and abroad, but lenders also give out loans for undergraduate and schooling expenses.

An education loan typically covers:

• Cost of tuition
• Cost of books and stationery
• Living expenses such as dorm charges or other accommodation
• Lab fees
• Library fees
• Cost of buying a laptop
• Other miscellaneous expenses

The number and amount of these expenses covered depends on each loan application. This amount is directly paid to the educational institution.

Student loans eligibility:

The eligibility criteria depends on:

• Course
• College or university
• Student’s merit
• Income of the student and co-applicant
• Any security or collateral

Although lenders do not generally require collateral, they may ask for some sort of security in case of a higher loan amount. Loans taken below Rs. 4 lakh don’t require any collaterals.

When does repayment begin?

An education loan generally works on a moratorium basis. This means that the installments are not immediately due after the loan is taken. The installments start getting payable a few months after the completion of education by the student. During the course period, the bank may charge simple interest on the principal outstanding, but this depends on case to case. Some lenders start proper repayment after the end of the course.

Student loans are given out for tenures between 5 to 7 years. The lender may extend this period on case to case basis. Most lenders don’t charge pre-payment fees in case of part payments during the loan tenure.

Conditions for an education loan:

Student loans are given out only when the student has a confirmed admission in an educational institution. Proof of admittance and the breakup of fees and other costs has to be submitted to the lender for processing the education loan.

The student has to apply for this loan. However, to increase the loan amount given, the student can have a co-applicant, usually the parent. This ensures a higher income that translates into a higher loan amount sanctioned.

These loans do not distinguish between the type of courses that the loan is taken for. This could be taken for a vocational course, a post-graduate masters, a diploma and in any field.

The lender does not finance the entire cost of education. Some amount has to be paid by the applicants from their own sources. The amount that the lender finances depends on each individual loan application and the lender.

Income Tax benefit:

Interest paid on an education loan gets a benefit under Section 80E of the Income Tax Act, 1961. This deduction is for the entire amount of interest paid during the year to the lender without any limits. The section does not restrict the deduction amount. It also does not distinguish between the course and whether the funds have been taken for education in India or abroad. This deduction for student loans interest is available for 8 years from the time the first installment is paid.