The cost of higher education in India has risen significantly, with tuition fees for certain professional courses often reaching several lakhs of rupees. For many families, relying solely on savings is not feasible, making education loans a practical solution to bridge the funding gap.

However, the educational loan in India needs to be taken judiciously because they typically have high interest rates and long repayment tenures. Choosing the wrong study loan could burden you for years after you complete your education. This blog post offers a step-by-step guide to help you make an informed choice when it comes to taking an educational loan in India.

Step 1: Estimate the Costs Involved

The first step is to calculate the total costs involved in your study plan. Account for:

• Tuition fees
• Exam fees
• Cost of books, stationery and supplies
• Living expenses like hostel/rent, food, transport, etc.
• Other expenses like a laptop, travel, etc.

Budget for miscellaneous/incidental expenses also. Overestimating costs is better than underestimating them while applying for a student loan. Financial institutions sanction loans based on the total expenses you declare in the application form.

Step 2: Explore the Various Loan Options

The two main educational loan options in India include:

1. Secured Loans: These require collateral, such as fixed deposits, property, etc., to cover the loan amount. The secured education loan interest rate is typically lower since your assets are already blocked as security.
2. Unsecured Loans: These don’t require collateral or security, but interest rates are higher. Leading public sector and private institutions offer these loans with customised repayment options. If you don't have assets to pledge, this is your best bet.

You can also check if you're eligible for subsidised education loans from government institutions if you meet their eligibility criteria of family income below ₹4.5 lakhs per annum.

Step 3: Check the Eligibility Criteria

Shortlist financial institutions as per their eligibility norms for annual family income, course & college reputation, minimum score in entrance tests, documents needed, etc. Many financial institutions have their in-house lists of approved colleges and courses. Their education loan eligibility criteria for overseas universities may also differ.

Step 4: Compare Interest Rates and Other Charges

Interest rates and processing fees vary widely between financial institutions. Government bank rates are usually more reasonable compared to private institutions. Compare all-inclusive costs like:

• Interest rates (fixed/floating)
• Processing/administration fees
• Security deposit for unsecured loans
• Repayment options and associated charges

Even a small difference of 0.5% in the interest rate can significantly impact on the total interest paid over a 7–10 year repayment period.

Step 5: Analyse Repayment Options

Check the repayment schedule. Some financial institutions allow repayment after 6 months or 1 year of completing the course, while others start demanding EMI right away. There are also special loans with repayment schedules aligned to expected salaries in your career stream.

Choose an option that gives you maximum flexibility without requiring you to default on your EMI payments. This will also ensure that your credit rating remains sound for future financing needs.

Step 6: Apply with Mandatory Documents

Once you've evaluated all aspects and shortlisted your preferred lender, it's time to submit your application. Keep these documents ready:

• Proof of identity, address, and finances
• Proof of admission & fee breakup from the university
• Marksheets of the competitive exam, if applicable
• Standard documents like ID/age proof, income statements, etc.

Follow up diligently with your bank to get approval and correct any shortcomings in your application.

The Bottom Line

Exploring your options for funding higher education is an important step toward achieving your academic ambitions while keeping your finances in check. It’s worthwhile to look closely at factors like total expenses, eligibility requirements, interest rates and repayment schedules before settling on a loan that matches your needs. If you want to get a clearer picture of what your monthly payments might look like, the Shriram Finance Student Loan Calculator is a handy resource-it lets you experiment with different amounts and terms so you can plan ahead with confidence.

FAQs

1. What factors should I consider before choosing an education loan?

Some key factors to consider are interest rates, repayment schedules, processing fees, lender eligibility criteria, and repayment flexibility or moratorium periods offered. Compare all-in costs across bank loans and pick the best education loan suited to your needs and future repayment capacity.

2. How do I know if I’m eligible for an education loan?

Financial institutions set eligibility criteria based on age, annual family income, course & university reputation, and minimum scores in entrance tests. Some institutions may also have an internal approved list of academic programs and institutions. Review specific lender websites in detail or speak to relationship managers to check if you meet the eligibility norms for an educational loan in India.

3. What is the difference between secured and unsecured education loans?

A secured student loan requires you to pledge an asset like property or fixed deposits as collateral to cover the loan amount. This allows you to access funds at lower interest rates. Unsecured loans don't need any asset security, but have higher interest charges as the lender takes on higher risk.

4. What is a moratorium period in student loans?

The moratorium or repayment holiday refers to the period after course completion when you don't need to start repaying the loan immediately. Many lenders offer flexibility of 6 months to 1 year before the EMI kicks in, allowing you time to find a job and stabilise cash flows.

5. Is it better to take an education loan for studying abroad or use savings?

Taking a loan is advisable even if you have sufficient savings to pay overseas university fees. You can invest your own money to earn returns that likely exceed education loan interest costs. This ensures you have assets backing you once you're back, given the high costs of settling abroad initially.

6. Are tax benefits available on education loans in India?

Yes, the interest paid on education loans sanctioned by approved charitable institutions offer tax benefits under Section 80E of the IT Act. There is no cap on the deduction amount, and the benefit can be claimed across years till the interest is paid off fully.

7. How much can I borrow through an education loan?

Most lenders fund up to 100% of tuition fees and living expenses declared to them. Quantum depends on the applicant's family income, academic credentials and admissions secured in specific universities or courses. On average, you can expect to get approval of ₹15-35 lakhs through an educational loan in India.

8. Can I prepay my education loan without penalty?

Yes, most financial institutions allow foreclosure or prepayment of education loans without levying any penalty. However, some charge a nominal 1-5% prepayment penalty if you close out the loan within 1-5 years of disbursement. Check the exact terms and charges applicable to your loan provider.