What is Education Loan Types Features and Eligibility
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What is Education Loan Types Features and Eligibility

Insurance Basics & Financial Advice Ever dreamt of studying at a prestigious university but worried about the cost? An education loan can turn those dreams into reality! It's a financial tool provided by banks and NBFCs (Non-Banking Financial Companies) to help Indian students like you pursue higher education, both domestically and abroad. With education costs rising steadily, education loans bridge the financial gap, making quality education accessible to a wider range of students.

What is Education Loan? Types, Features & Eligibility

8 Minute |

What is Education Loan? Types, Features & Eligibility

What is an Education Loan?

Ever dreamt of studying at a prestigious university but worried about the cost? An education loan can turn those dreams into reality! It's a financial tool provided by banks and NBFCs (Non-Banking Financial Companies) to help Indian students like you pursue higher education, both domestically and abroad. With education costs rising steadily, education loans bridge the financial gap, making quality education accessible to a wider range of students.

How does an Education Loan Work?

Let's say you secure admission to your dream medical college. The fees might seem daunting, but an education loan can cover them. You borrow a specific amount (principal) from the bank at a pre-determined interest rate. You then repay the loan amount and the interest in equated monthly instalments (EMIs) after a specified course completion and moratorium period.

Education loans are a boon in India, where quality education often comes at a premium. They empower students to focus on their studies without financial constraints, paving the way for a brighter future.

Types of Education Loans

Education loans can be categorised based on various factors such as location, course and collateral. Below are key education loan details.

Based on Location

These can be domestic education loans (for studying in India) or international education loans (for studying abroad). Domestic education loans are ideal for pursuing studies within India, covering tuition fees, hostel expenses, and books.

International education loans are designed to finance studies abroad, covering higher costs associated with foreign universities and living expenses.

Based on Course

These education loans can be tailored to specific courses like medicine, engineering, MBA, etc. Course-specific education loans are tailored to meet the specific needs of different fields like medicine, engineering, or management. These course-based education loans may offer higher loan amounts considering the potential higher course fees.

On the other hand, general education loans are applicable to a wider range of courses, with loan amounts determined by factors like university reputation and course duration.

Based on Collateral

Secured education loans require collateral like property, while unsecured loans don't. Collateral-based loans are backed by property or fixed deposits. Note these loans often offer larger loan amounts and potentially lower interest rates.

Unsecured education loans are sanctioned without collateral, typically for smaller amounts and may have higher interest rates.

Features and Benefits

Education loans offer various advantages to students.

Firstly, they enable you to finance your education comprehensively, covering expenses such as tuition fees, hostel charges, book costs, and other education-related expenditures.

Secondly, education loans provide flexible repayment options. You can repay the loan after completing your course, with a moratorium period that allows you to get established in your career before beginning repayments.

Thirdly, there are potential tax benefits associated with education loans. Depending on prevailing tax laws, you may be able to claim deductions on the interest paid on your education loan, reducing your tax burden.

Lastly, obtaining a degree from a reputable institution through an education loan can significantly improve your career prospects. It can enhance your employability and potentially increase your earning prospects in the future.

List of Expenses Covered under Education Loan

Education loans are designed to cover a broad spectrum of expenses related to your studies. These may include Tuition fees, which form the core expense of your education, Examination fees, which ensure you're covered for assessments throughout your academic journey, and Library fees, which enable access to essential resources for research and study.

Other expenses covered under education loan are Hostel charges if you're living on campus or in university accommodation, Lab fees which are often mandatory for courses with practical components, and Travel expenses particularly relevant if you're studying abroad and need financial support for transportation.

Costs associated with purchasing books and study materials essential for your coursework are also provided. In some cases, education loans may also cover the purchase of a laptop or computer if it is necessary for your course, ensuring you have the required technology to succeed academically.

Documents Required for Applying for Education Loan

When applying for an education loan, the documentation required can vary slightly depending on the bank or financial institution. However, typically, you will need to provide a completed application form detailing your personal and financial information, an admission offer letter from the university or educational institution you plan to attend confirming your acceptance into the programme, and academic transcripts or mark sheets from your previous qualifications, demonstrating your academic background.

Proof of identity, such as an Aadhaar card or PAN card, to verify your identity, income proof of your parents or guardian, which may include salary slips or income tax returns (ITRs), to assess your family's financial situation and repayment capacity, are also required.

Apart from these, do arrange a sanctioned fee letter from the institute outlining the tuition fees and other expenses for the duration of your course. This will help the lender understand the amount you need to borrow. Having these documents ready can streamline the education loan process and increase your chances of approval.

Education Loan Eligibility

Eligibility criteria for education loans may vary among lenders, but here are some commonly considered factors.

  1. You have to be a resident Indian student seeking financial support for education.
  2. You should meet age criteria, typically between 18 and 35, ensuring applicants are within a certain age range.
  3. You have to attain minimum academic marks in previous examinations, demonstrating a certain level of academic achievement.
  4. You need to secure admission to a recognised university or institution for a specific course, indicating the intent to pursue higher education at a reputable establishment.

These criteria serve as a benchmark for lenders to assess the suitability of applicants for education loan approval.

Tax Benefits on Education Loan

The interest paid on education loans qualifies for tax deduction under Section 80E of the Income Tax Act, 1961. This benefit can significantly reduce your overall loan repayment cost.

Imagine you take an education loan of ₹5 lakh for your studies. The interest rate on the loan is 10% per year. In the first year, you pay ₹50,000 as interest (10% of ₹5 lakh). Under Section 80E, you can deduct this ₹50,000 interest payment from your taxable income. This reduces your tax liability, essentially giving you a tax benefit on the interest paid.

Let's say your tax bracket is 20%. Due to the deduction under Section 80E, you effectively save ₹10,000 in taxes (20% of ₹50,000) in the above example. This reduces the overall cost of repaying your education loan. So, the tax deduction under Section 80E helps you save money on interest payments, making education loans more manageable.

Education Loan EMI Calculator

Many banks and NBFCs offer online education loan EMI calculators. These tools help you estimate your monthly EMI payments based on the loan amount, interest rate, and loan tenure.

Here's how the education loan calculator operates. You provide Loan Amount, Interest Rate, and Loan Tenure inputs. Basis that the calculator will generate the EMI. Additional features (available in some calculators) are a breakdown of interest paid and principal paid.

Some calculators may display a breakdown of how much of your EMI contributes to interest versus paying off the principal over time. You might have the option to adjust the interest rate and loan tenure to observe how they impact your monthly EMI.

How to Apply

Financing your education can be daunting, but education loans bridge the gap. Here is how you can navigate the education loan process confidently.

Step 1 involves scouting for the perfect loan. Assess your financial needs, research loan schemes, and compare options to shortlist lenders. Utilise online resources and loan calculators to estimate repayments.

Step 2 focuses on assembling documents. Gather essentials like application forms, admission letters, academic transcripts, identity and residence proofs, income statements, fee structures, and any lender-specific documents.

Step 3 covers the application process. Fill out forms accurately, choose between online or offline submission, and ensure documents are clear and self-attested.

Step 4, loan approval and sanction, involves the lender's evaluation based on eligibility criteria, academic records, and financial background. Upon approval, negotiate terms and finalise disbursement.

Remember to negotiate terms like interest rates and processing fees. Shortlisting competitive offers strengthens your bargaining position.

Study Loan Repayment System

Education loans in India have soared in popularity since the 1990s, fueled by a booming higher education sector and a growing middle class. Prior to this, financing studies were largely limited to personal resources or scholarships.

Government initiatives and competitive loan schemes from banks and NBFCs (Non-Banking Financial Companies) bridged the gap, making quality education more accessible.

The repayment system for these loans follows a structured approach. After completing your course, a grace period, typically 6 months to 1 year, allows you to find employment. Once this moratorium period ends, you enter the repayment phase. Here, you will make fixed monthly instalments called EMIs (Equated Monthly Installments). These EMIs are calculated based on the loan amount, interest rate, and repayment tenure (usually up to 15 years). Each EMI goes towards paying off both the principal amount you borrowed and the interest accrued on it.

By planning your finances effectively and utilising tax benefits on interest payments, you can conclude the repayment phase smoothly, ensuring a successful journey of education and financial well-being.

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