Important factors to keep in mind when taking out an education loan

Another very important factor to consider when comparing student loan products is the processing fee. Other fees should also be checked, including late fees, prepayment penalties, and other hidden charges.

Quality education often comes with a price that increases rapidly over time. For example, an MBA degree from ISB which cost around Rs 26 lakh in 2016 has skyrocketed to Rs 40 lakh in 2021, an increase of 65% in just 5 years. Education abroad is no exception either. In such a scenario, student loans become a support system for students unable to afford such astronomical expenses.

How to finance your higher education?

The student loan options available for studying in India and abroad can be divided based on the type of loan and the lender. Lenders can be categorized into four sections – public sector banks, private banks, NBFCs, and alternative lenders like Prodigy Finance and GyanDhan, while the type of loans broadly falls into two categories – secured loans (loan with collateral) and unsecured loans (loan without collateral).

Public sector banks like SBI, Bank of Baroda, and Punjab National Bank dominate the education loan market. Lower interest rates, longer repayment periods, no repayment during the study period, and tax benefits are some of the factors that make public sector bank loans attractive. Banks only require collateral for loans over Rs 7.5 lakh. Students looking for loans for admission to leading educational institutions in India can get unsecured loans for higher loan amounts at low rates, starting at 6.75% in the case of the Bank of Baroda. Experts say public sector banks should always be preferred for study abroad if the applicant can provide collateral.

Ankit Mehra, Founder and CEO of Gyandhan, said: “If one has no collateral to offer and the requirement exceeds Rs 7.5 lakh, unsecured loans from private banks, such as Axis Bank or ICICI Bank, could be the next choice. NBFCs generally charge the highest interest rate on loans and are last in order of preference for education loans.

He further adds: “For context, if one is considering pursuing higher education abroad, interest rates on guaranteed loans from public sector banks start as low as 7.75% compared to the lowest interest rate offered by NBFCs which typically starts at 10.25 percent. hundred.”

Factors to take into account when taking out a student loan

Experts say that some of the factors to consider when choosing the right lender are the nature of the interest rate (variable or fixed), other fees, margin, ease of processing, and flexibility of the loan terms offered. .

Mehra says, “A fixed interest rate allows the borrower to repay the loan in fixed installments depending on the length of the loan, while a floating interest rate is tied to the base rate offered by the lender and can vary. during the term of the loan. This becomes critical when interest rates are at their extremes in any cycle. “

Another very important factor to consider when comparing student loan products is the processing fee. Other fees should also be checked, including late fees, prepayment penalties, and other hidden charges.

Mehra adds, “APR (Annual Percentage Rate) is typically used to compare 2 loans with different interest rates and fees. It gives a total cost of funds including fees rather than just comparing the interest rate, which could be misleading. Consider 2 scenarios, Lender A offers a 3 year 11% loan with no processing fees while Lender B offers the same 10% loan but charges an upfront fee of 2%. In this case the second loan is more expensive as the total repayments in the second case of Rs 118,232 will be higher than in the first case of Rs 117,946 assuming the loan amount was Rs 1 lakh.

Another important aspect to consider is the cash margin. Margin money is the part of the total expenses that you will have to pay yourself while the bank pays the rest of the amount. Banks like SBI charge a 10% margin on their Global Ed-Vantage program, while the Bank of Baroda, as part of its Baroda Scholarship Program for Study Abroad, charges no margin for admission to institutions on the list of leading institutions.

“NBFCs trump banks and the private sector over public sector banks when it comes to ease of processing and providing specialized lending terms. NBFCs offer a much faster turnaround time when it comes to loan processing, ”Mehra explains.

NBFCs can also respond to cases that would not fit into a bank’s policy, although this comes at the cost of a higher interest rate. However, note that public sector banks start at 7.75 percent from the lowest interest rate offered by NBFCs, which typically starts at 10.25 percent.