Introduction
Education is a great tool that opens the doors to improved career prospects and economic stability. Yet, higher education usually demands huge financial outlays. With increasing tuition fees and related costs, most students and families struggle to finance education without help from others. Education loans provide a practical solution by providing financial support to pay for tuition fees, textbooks, accommodation, travel, and other educational expenses.
Although it is a general trend to take an education loan, securing one with a low rate of interest and easy repayment schedule needs proper planning. A high rate of interest can easily double the total amount to be repaid, making it tough to cope with expenses after graduation. Likewise, stringent repayment plans can lead to financial hardship if the borrower fails to secure a high-paying job shortly after graduation.
This tutorial will guide students and their families about how to get the best education loans with minimal financial burden, an interest in saving money and an interest in studying.
Understanding Education Loans
An education loan is a financial product that specifically caters to the needs of students pursuing higher education. The loan is generally repaid at the end of the course, enabling students to concentrate on studies without the burden of immediate expenditure.
Types of Education Loans
Education loans can be segregated into various categories depending on collateral needs, geographical area, and the lending institution.
Secured and Unsecured Education Loans
Collateral like property, fixed deposits, or insurance policies is necessary for secured education loans. With security in terms of collateral for the lender, the interest on such loans tends to be less. Unsecured education loans, however, don’t need any collateral, thereby making them preferable for students without good assets. Unsecured education loans tend to carry higher rates of interest, however.
Domestic and International Education Loans
Domestic education loans are intended for students undertaking higher studies in their home country. Domestic education loans typically carry less interest and are often subsidized by the government. International education loans are intended for students who are studying abroad. They also provide for additional expenses like travel, visa, and foreign exchange, and can have varying eligibility standards.
Government and Private Education Loans
Government-supported education loans are available from public sector banks and financial institutions at reduced interest rates. Certain government schemes offer interest subsidy for the economically weaker sections of society. Private education loans are made available by private banks and non-banking financial companies. They can be more flexible regarding repayment but tend to have slightly higher interest rates.
How to Avail an Education Loan at a Low Interest Rate
Availing an education loan at a low interest rate needs diligent research and financial planning. There are many factors that influence the interest rate charged by banks and lending institutions.
Compare Loan Offers of Various Lenders
It is essential to compare several lenders before taking a loan. Various banks and financial institutions have different interest rates depending on their policies and risk assessment. Borrowers must review factors like the nature of the interest rate, fixed or floating, loan period, processing charges, prepayment penalty, and eligibility. Most government banks charge lower interest rates compared to private lenders, particularly for students seeking loans under government subsidy schemes.
Have a Good Credit Score
As students might not have a credit history, banks look into the credit score of their co-applicant, typically a guardian or parent. A good credit score of more than seven hundred improves the probability of getting a lower interest rate. If the co-applicant has previous loans or late payment history, this could influence the loan approval process and the rate of interest quoted.
Choose a Secured Loan if Possible
Offering collateral in the form of property, fixed deposits, or government bonds can help in obtaining a lower interest rate. Lenders consider secured loans less risky, which often leads to better terms and conditions.
Opt for Government Education Loan Schemes
Various governments offer education loan programs with subsidized interest to economically weaker sections of students or target groups. In India, the Dr Ambedkar Interest Subsidy Scheme offers subsidization of interest on loans for economically weaker section students. In the US, federal student loans are cheaper compared to private institutions. Borrowers may inquire if they are eligible for any government-funded programs before availing of a private loan.
Apply Early to Avoid Last-Minute High-Interest Loans
Applying early provides the opportunity for students to research a variety of sources and get low interest rates. Last-minute lending usually leads to few choices and high interest due to desperation.
Negotiate with the Lender
Some lenders and financial institutions provide lower interest rates to students with good academic performance or admission to prestigious institutions. Negotiation with the lender can at times lead to improved terms. In case the borrower has been awarded scholarships or enjoys a good job prospect upon graduation, it could improve their bargaining position.
How to Get Flexible Repayment Options
Taking a study loan with convenient repayment periods assures the lender can settle the debt comfortably upon the completion of education. Convenient repayment plans prevent loan defaults and minimize financial tension.
Find Loans that Have a Moratorium Period
Most education loans have a moratorium period, a grace period prior to repayment. The period usually extends from six months to one year after completion of the course. Opting for a loan with a longer moratorium period helps students gain steady employment before they begin EMI payments.
Opt for a Loan with Longer Repayment Tenure
A longer repayment term lowers the monthly EMI amount, which is easier to sustain after graduation. Borrowers need to keep in mind that a longer term may lead to greater total interest paid. The balance has to be achieved between affordable EMI levels and total interest paid.
Go for Step-Up Repayment Plans
Step-up repayment facilities provide an opportunity to the borrowers to begin with small EMI repayments that go on increasing with rising income levels. This suits students who anticipate salary increments in the future. It helps in ensuring that the repayment of loans does not burden the borrower during the initial years of employment.
Think of Partial Prepayment Options
Most lenders permit partial prepayments at no cost. Borrowers are free to pay extra amounts as and when they earn additional income through bonuses, scholarships, or side incomes. This lowers the principal amount and reduces the interest burden.
Check for Income-Based Repayment Plans
Certain financial institutions provide income-based repayment plans wherein EMI payments are adjusted as per the borrower’s income level after graduation. In this way, students are not pressured with heavy EMIs in the early years of their careers.
Steer Clear of High Foreclosure Charges
Some lenders charge foreclosure fees if the borrower pays the loan back early before the end of the tenure. Going for a lender that does not charge for prepayment can facilitate the loan closure earlier and also save interest payment.
Documents Needed for an Education Loan
For getting an education loan, students must provide the following documents
Identity evidence like Aadhaar card passport or driving license
Address evidence like utility bills voter ID or ration card
Academic documents like admission letter mark sheets and certificates
Course fee structure as given by the educational institution
Income evidence of co-applicant like salary slips income tax returns and bank statements
Collateral documents if applying for a secured loan like property documents or fixed deposit receipts
Common Mistakes to Avoid While Applying for an Education Loan
While education loans are a great way to fund higher studies, many students and their families commit blunders which may result in financial issues in the future. Avoiding these errors can provide better loan conditions and facilitate easier repayment.
Not Comparing Loan Offers from Different Lenders
The most frequent mistake made by students is to accept the initial loan offer that they receive. Interest rates, repayment schedules, processing charges, and benefits of the loan differ among lenders. By comparing several loan offers from government banks, private banks, and non-banking financial companies, students can get a loan with the lowest interest rate and optimum repayment facilities.
Ignoring Loan Terms and Conditions
Most borrowers pay attention to only the loan amount and the interest rate, without considering other vital details like prepayment fees, processing charges, late payment fees, and moratorium terms. Careful reading of the fine print will help to ensure that there are no excessive charges or onerous terms that will cause financial hardship in the future.
Borrowing More Than Necessary
Certain students borrow more than their tuition costs, such as personal spending, transportation, and discretionary items. Education loans are intended to finance students, yet borrowing more than required adds to the total debt. It is better to borrow only what is needed to keep interest payments to a minimum.
Postponing Repayment Planning
Most students only concentrate on obtaining the loan and not on repayment. There must be a repayment plan in place much before the loan repayment schedule starts. Awareness of EMI commitments, repayment term, and potential prepayment facilities can guide borrowers to escape financial pressure at the time of graduation.
Not Considering Government Subsidies
Some governments have interest subsidy schemes for economically weaker section students or certain categories of students. Neglecting eligibility for such subsidies can result in unnecessary financial losses. For instance, in India, government schemes offer interest-free education loans for certain categories of students during the moratorium phase.
Neglecting the Role of a Good Credit Score
A co-applicant’s credit history is important for the loan approval and interest rate. The student may get higher interest rates or loan rejection if the co-applicant does not have a good credit history. It is advisable to ensure that the co-applicant maintains good credit history prior to applying for a loan as it can greatly enhance the loan terms.
Conclusion
Obtaining an education loan with a favorable interest rate and easy repayment schedule involves planning and research. Comparing offers, having a good credit history, choosing government schemes and negotiating loans enable students to get the most favorable terms for the loan. Advance planning of repayment methods facilitates fiscal stability upon graduation enabling students to concentrate on their careers without excessive financial burden.
