Quality education often comes with a price surging rapidly with the passage of time. For instance, an MBA degree from ISB which used to cost around Rs 26 lakh in 2016 has skyrocketed to Rs 40 lakh in 2021- an increase of 65 per cent in a span of just 5 years. Abroad education is also no exception. In such a scenario, educational loans become a support system for students unable to afford such astronomical expenses.
How should you fund your higher education?
Education loan options available for studying in India and abroad can be bifurcated based on the type of loan and lender. Lenders can be categorized into four sections – public sector banks, private banks, NBFCs, and alternative lenders like Prodigy Finance and GyanDhan, whereas the type of loans falls broadly into two brackets – secured loans (loan with collateral) and unsecured loans (loan without collateral).
Public sector banks like SBI, Bank of Baroda, Punjab National Bank dominate the education lending market. Lower interest rates, longer repayment periods, no repayment during the study period, and tax benefits are some of the factors that make loans from public sector banks appealing. Banks require collateral only for loans beyond Rs 7.5 lakh. Students seeking loans for admission into premier education institutions in India can get unsecured loans for higher loan amounts at low rates, starting at 6.75 per cent in the case of Bank of Baroda. Experts say that public sector banks should still be preferred for overseas studies if the applicant can provide collateral.
Ankit Mehra, Founder and CEO, Gyandhan, says, “In case one does not have any 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 typically charge the highest interest rate on loans, and are the last in the order of preference for education loans.”
He further adds, “For context, if one is planning to pursue higher studies abroad, interest rates on secured loans from public sector banks start as low as 7.75 per cent as compared to the lowest interest rate offered by NBFCs which typically starts at 10.25 per cent.”
Factors to keep in mind while taking an education loan
Experts say some of the factors to be taken into consideration when choosing the right lender are the nature of interest rate (floating vs fixed), other charges, margin money, ease of processing and flexibility in loan terms being offered.
Mehra says, “A fixed interest rate allows the borrower to repay the loan in fixed instalments as per the loan tenure while a floating interest rate is linked to the base rate offered by the lender and can vary over the life of the loan. This becomes critical when the interest rates are at their extremes in any cycle.”
The processing fee is another very important factor to consider while comparing education loan products. One also needs to check for other charges including late fees, pre-payment penalties, and other hidden charges.
Mehra further 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 might be misleading. Consider 2 scenarios, lender A offers a 3-year loan at 11 per cent with no processing fees whereas lender B offers the same loan at 10 per cent but charges an upfront fee of 2 per cent. In this case, the second loan is costlier 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 margin of money. Margin money is the part of total expenses that you will have to pay yourself while the bank pays the rest of the amount. Banks like SBI charge margin money of 10 per cent on their Global Ed-Vantage scheme while Bank of Baroda, under its Baroda Scholar Scheme for Study Abroad, does not charge any margin money for admission to Institutions under the list of premier institutions.
“NBFCs trump over banks, and private sector over public sector banks when it comes to ease of processing and offering specialized loan terms. NBFCs provide a significantly faster turnaround when it comes to loan processing,” says Mehra.
NBFCs can also cater to cases that wouldn’t fit in a bank’s policy, though it comes at the cost of a higher interest rate. However, note that public sector banks start as low as 7.75 per cent compared to the lowest interest rate offered by NBFCs, which typically starts at 10.25 per cent.