helping hand

Written by Saikat Neogi | Updated: Feb 28 2012, 06:20am hrs
With the country's largest public sector bank, State Bank of India (SBI), reducing the interest rate on education loans by up to one percentage point, it will certainly benefit a large section of students who fund their higher education expenses through bank loans. Since SBI is a major player in the education loan segment, it will also force other banks to reduce their rates and pop up the education loan segment in the country.

For education loans up to R4 lakh, SBI will charge an interest rate of 13.50% against the current 13.75%. For loans between R4 lakh and R7.5 lakh, the interest rate will be 13.25%, against 14.25%. Interest rates on loans beyond R7.5 lakh will be 12%. Moreover, the bank will offer 0.50% additional concession for girl students and 1% concession will be given for the entire tenure of loan, if full interest is serviced during the moratorium period.

Currently, banks offer education loans to students with Indian nationality in the age group of 16-35 years. For availing loans below R4 lakh, an applicant does not have to give any security and a third-party guarantor or security amount. The guarantor

of the loan could be the applicant's parent, working sibling or even spouse, if he or she is working, and in-laws or other close relatives. Banks have ensured special rules for meritorious student. Apart from easier disbursement, a meritorious student can even bargain with the bank for a lower rate of interest.

Banks in the last one year have been very cautious in the education loan segment as defaults have been rising because of lower employment opportunities. Moreover, with the drop in the rupee, the demand for education loan, too, dropped. While SBI has reduced its interest rates, the rates charged by other banks varies from 14% to 17% for loans up to R4 lakh for a period of seven years and between 12-15% for loans above R4 lakh for a period of seven years.

All banks charge a processing fee, which can vary between 0.5 % and 2.5 % of the total loan amount the student is applying for. The maximum loan amount a student an avail for studies in India is R10 lakh and R20 lakh for studying abroad.

Some banks offer discounts on the interest rate for female students. One can claim income-tax deductions for repayment of an education loan for higher education under Section 80E of the Income Tax Act, 1961.

For documentation, the

bank will require proof of identity, age and address. The student will have to furnish the admission letter of the institution and the fee structure of the particular course for each semester or annual charges. If the student is going abroad for the course for which he is seeking the loan, then he will have to give the passport details, GMAT

or GRE score, total expenses for the course and all other travel documents to the bank.

Bankers say a borrower should tie up the loan after getting the visa approval. In case of a co-applicant, the same documents plus income proof have to be given to the bank

The government provides full interest subsidy during the period of moratorium on loans taken by students belonging to economically weaker sections from scheduled banks, where the annual parental income does not exceed R4.5 lakh per year. The scheme is applicable for students pursuing technical and professional courses in India. After the period of moratorium is over, the interest on the outstanding loan amount is paid by the student.

The interest subsidy under the scheme is available to students only once, either for the first undergraduate degree course or the postgraduate degree/diploma course, and

will not be available to those who either discontinue the course midway or those who have been expelled from the institution on disciplinary or academic grounds.

Unlike home, auto or personal loans, those taking education loans do not have to do immediate repayments and can start

after completing their course and securing a source of income. The moratorium period of the loan is the course period plus one year or six months after getting a job, whichever is earlier. Banks usually keep a window of 5-7 years for repaying the loan and can give an extension of another two years if the borrower has a good repaying history.

To make education loans more affordable to students, the Indian Bank's Association is currently reviewing the current structure and will suggest a longer time period to repay the loan for students who have had a brilliant academic record. However, getting a loan may tougher for those who do not have a sound past-academic record and even those who pay hefty capitation fee to get into engineering, medical or management courses.