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Pursuing higher education abroad opens doors to world-class institutions and global career opportunities. However, the rising costs of tuition, accommodation, and travel can be daunting. Understanding how an education loan works helps bridge the financial gap, enabling you to focus on your academic goals.
This blog explains the mechanics of how an education loan works, its features, eligibility, and repayment options, providing a clear roadmap to fund your international education. Let’s get started!
This Blog Includes:
How an Education Loan Works and Its Application Process?
An education loan is a financial product designed to cover the costs of higher education, including studies abroad. Knowing how an education loan works ensures you make informed decisions about financing your studies.
Navigating the application process is a critical step in understanding how an education loan works. A streamlined approach ensures quick approval and an education loan disbursement process. Here are the steps:
- Step 1: Research Lenders: Compare banks and NBFCs for interest rates, loan amounts, and terms.
- Step 2: Check Eligibility: Confirm you meet criteria like admission to a recognized institution and age limits (18–35 years).
- Step 3: Gather Documents: Submit identity proof, admission letter, academic records, and income proof of the co-applicant.
- Step 4: Apply Online or Offline: Use portals like VidyaLakshmi Portal or visit a bank branch.
- Step 5: Loan Sanction and Disbursement: After approval, funds are disbursed directly to the institution or your account.
Key Tip: Start the process 2–3 months before the course begins to avoid delays.
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Expenses Covered by Education Loans
Education loans cover a wide range of expenses, making them a comprehensive solution for funding studies abroad. Understanding how an education loan works includes knowing what costs it can offset.
- Tuition Fees: Full or partial coverage of course fees.
- Accommodation: Hostel or rented housing expenses.
- Travel: Airfare or other transportation costs to the study destination.
- Study Materials: Books, laptops, and other academic resources.
- Other Costs: Examination, library, and laboratory fees.
Interest Rates and Subsidies with Education Loans
Interest rates significantly impact the total cost of an education loan. Knowing how an education loan works involves understanding how interest is calculated and available subsidies.
Interest Rate Structure
Interest rates vary based on the lender, type of education loan, and course. Nationalised banks often offer lower rates, especially for premier institutions.
- Fixed Rates: Remain constant throughout the loan tenure (e.g., 9–10% for secured loans).
- Floating Rates: Linked to the Marginal Cost of Funds-based Lending Rate (MCLR), fluctuating with market conditions (e.g., 11–14%).
- Concessions: 0.5–1% discounts for female applicants or students at top-tier institutes like Ivy League schools.
Government Subsidies with Education Loans
Government schemes reduce the financial burden for eligible applicants.
- Central Sector Interest Subsidy (CSIS): Full interest subsidy during the moratorium period for families with income up to INR 4.5 lakh, applicable to loans up to INR 10 lakh.
- PM-Vidyalaxmi Scheme: Offers collateral-free loans and 3% interest subvention for families earning up to INR 8 lakh, for studies at top 860 institutions.
Moratorium Period in Education Loans
The moratorium period allows you to defer repayments during your studies, giving you time to focus on academics.
- Duration: Course duration plus 6–12 months after completion.
- Interest: Simple interest accrues during this period, added to the principal for repayment.
- Benefit: No immediate repayment pressure, ideal for job hunting post-graduation.
Repayment Tenure in Education Loans
The repayment structure is a key aspect of how an education loan works. After the moratorium, you repay the loan through Equated Monthly Installments (EMIs).
- Tenure: Up to 15 years, depending on the lender and loan amount.
- Options: Flexible EMIs, with some banks offering step-up or step-down repayment plans.
- Tax Benefits: Income tax rebate on education loan under section 80E for up to 8 years.
Example: For an INR 20 lakh loan at 10% interest with a 10-year repayment tenure post a 1-year moratorium, the EMI would be approximately INR 27,800.
Also Read:
- How Much Time Does It Take to Get an Education Loan?
- Collateral in Education Loan: Types, Eligibility & More!
Eligibility and Documentation Required for Education Loans
Securing an education loan requires meeting specific education loan eligibility criteria and submitting key documents. Understanding how an education loan works includes preparing for these requirements. Let’s understand them one by one:
Eligibility Criteria for Education Loans
Lenders assess your academic and financial background before approving the loan.
- Nationality: Must be an Indian resident.
- Admission: Confirmed admission to a recognized international institution.
- Age: 18–35 years at the time of application.
- Co-applicant: Parent or guardian with a stable income and good credit score.
Required Documents
Proper documentation ensures a smooth application process.
- Identity Proof: Passport, Aadhaar card, or voter ID.
- Admission Proof: Offer letter from the university.
- Academic Records: Mark sheets of 10th, 12th, and prior degrees.
- Income Proof: Co-applicant’s ITR, salary slips, or bank statements.
- Collateral Documents (if applicable): Property papers or fixed deposit certificates.
Pro Tip: Use digital folders to organize documents and check validity to avoid rejection.
Understanding how an education loan works empowers you to finance your dream of studying abroad without financial stress. From covering tuition and travel to offering flexible repayment terms, education loans provide a practical solution for funding higher education. By researching lenders, leveraging government subsidies, and preparing the right documents, you can secure a loan that aligns with your academic and financial goals.
FAQ
An education loan for international studies covers expenses like tuition, accommodation, and travel. You borrow funds from a bank or NBFC, repayable after a moratorium period (course duration plus 6–12 months) through EMIs over a tenure of up to 15 years.
Education loans fund tuition fees, hostel or rental costs, airfare, study materials like books and laptops, and other academic expenses such as examination or library fees, ensuring comprehensive financial support for studying abroad.
To qualify, you must be an Indian resident aged 18–35 with confirmed admission to a recognized international institution. A co-applicant, typically a parent or guardian with a stable income and good credit score, is also required.
Secured loans require collateral like property, offering lower interest rates (9–11%) and higher loan amounts (up to INR 1.5 crore). Unsecured loans need no collateral but have higher rates (11–14%) and stricter eligibility criteria.
Yes, schemes like the Central Sector Interest Subsidy (CSIS) and PM-Vidyalaxmi offer interest subsidies or collateral-free loans for eligible applicants with family incomes up to INR 4.5–8 lakh, reducing the financial burden.
The repayment period typically ranges from 7 to 15 years, starting after a moratorium period (course duration plus 6–12 months). Lenders like SBI and ICICI Bank offer flexible tenures based on the loan amount.
Interest rates vary: secured loans range from 9–11%, while unsecured loans range from 11–14%. Rates depend on the lender, course, and institution. Concessions may apply to female applicants or top-tier universities.
Yes, unsecured education loans are available from banks like ICICI and NBFCs like Avanse, offering up to INR 50 lakh without collateral. These require a strong academic record and a co-applicant with a good credit score.
You need identity proof (passport, Aadhaar), admission letter, academic records (10th, 12th, degree mark sheets), co-applicant’s income proof (ITR, salary slips), and collateral documents for secured loans.
Yes, under Section 80E of the Income Tax Act, you can claim a deduction on the interest paid on an education loan for up to 8 years, applicable for loans taken for higher education abroad or in India.
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