Twelve years after education loans were first introduced in India, between five and seven percent of loans remain in default. Most of these defaults are in the under-Rs. 4 lakh-category, approved without collateral.
 
“Once we received an application for an education loan, we could not reject it without the approval of the branch manager. A number of loans were sanctioned without adequate checks,” says a State Bank of India official, speaking about the defaults taking place before revisions were made to the loan guidelines in September 2012. According to the Indian Banks Association, the review exercise was implemented to make the scheme more transparent, and minimise scope for disputes.
 
Almost 96 percent of education loans are disbursed by public sector banks in India. However many foreign banks are reluctant to get into this segment, as returns are low and stringent background checks, as well as regular follow up, is necessary.
 
Banks follow up with universities for regular academic progress reports for students who have taken out loans. In cases where students are going abroad for their higher studies, banks track a unique identification number for the student to monitor their progress.
 
Education Loans – The Indian Banks’ Association (IBA) Revised Policy; September 2012
 
The Basics

Indian students can take out education loans from private or nationalised banks for pursuing higher studies in India or overseas, at colleges and universities approved by the banks. A student, 16 years and above, having completed the basic academic 12 years of schooling, must have secured admission into a recognized institution before applying for a loan.

The course of study for which a loan may be taken out, can include graduate or post-graduate study programs, professional or technical course in any discipline, including courses conducted by international professional bodies (ie. the CIMA (UK) or CPA (USA); degree or diploma courses such as aeronautical, pilot training, shipping, nursing or any other discipline approved and recognised by competent regulatory bodies in India/abroad for the purpose of employment, and even  approved courses offered in India by reputed foreign universities. [Information from the IBA website]
 
Students of any age can apply for an education loan. Management, hospitality, healthcare and IT disciplines enjoy an edge while universities in the U.S., U.K., Canada, Australia and New Zealand are popular destinations among loan applicants.
 
Coverage

Expenses considered under an education loan include fees payable for the course - to the university, accommodation, examination, library and laboratory fees, purchase of books, equipment, instruments, and uniforms, travel expenses, purchase of computer, building fund or security deposit not exceeding 10 per cent of the total tuition fees for the entire course and supported by bills and receipts, insurance premium for the student borrower – as well as other expenses required to complete the course, such as study tours, project and thesis work.
 
Maximum Loan Amounts

Most banks give loans of up to Rs. 10 lakh (US$16,500) for studies in India and up to Rs. 20 lakh (US$33,000) for studies overseas. Some banks do however offer educational loans up to Rs. 30 lakh (US$49,000) for studies abroad, subject to the repayment capacity of the parents.
 
The Interest Rate effect

Interest rates are linked to the base rate as decided by individual banks and so vary from bank to bank, falling between 12 and 15 percent. Banks offer various interest rates on education loans, based on the rating of courses/institutions/students.
 
The current interest rate, as of August 2013, for loans up to Rs. 4 lakh (US$6,500), is around 13.45 per cent, with higher figure loans charged at 13.2 per cent.  
 
Nationalised Indian banks offer a one percent concession for female students. There is also a one percent rebate if repayments have been regular.
 
Subsidies for Some

Students from families with an annual income of less than Rs. 4.5 lakh, are eligible for an interest subsidy during the moratorium period, that is the time period after the loan is given and before the student starts repayment, for which the borrower is usually charged the accumulated interest. If the student is eligible for interest subsidy, the accumulated interest will be paid to the bank by the central government. No payment on the education loan’s interest is required while the student is enrolled in an Indian institution.
 
How Long Can I keep a loan for?

For loans up to Rs. 7.5 lakh, you can take up to 10 years to repay – but be careful as this may include the period of time during which you were a student. For larger loans, you may be given up to 15 years to repay.
 
Paying Back the Loan

Repayment starts one year after the completion of a course, or six months after getting a job, whichever comes first. However, to ease the interest burden, you may choose to pay the interest during the moratorium period (when no payments are technically required), and receive an interest rate concession.
 
If the student is not able to complete the course within the scheduled time, extension of time for completion of course may be permitted for a maximum period of 2 years. In case the student discontinues the course midway, an appropriate repayment schedule will be worked out by the bank in consultation with the student/parent.

Collateral Requirements

There is no collateral required for a loan up to Rs. 4 lakh for education in India. For higher amounts, suitable collateral security must be provided – this includes: the equivalent amount of fixed deposits in the name of the student, public sector bonds, gold shares, mutual fund units, national savings certificates, home or property mortgages, or a pledge of a portion of the student’s future income for payment in instalments.
 
Parents or guardians are generally named joint borrowers. The bank may also insist on a third party guarantor for the entire loan amount.
 
Margin Money: The Expenses

Margin Money is the amount to be given by the student - calculated as a percentage of the loan. There is no margin money requirement for a study loan up to Rs. 4 lakh. For a higher loan amount, for a course within India, around five percent of the loan is requested as margin money. For study overseas, around 15 percent is required. If a student needs a loan of Rs 15 lakh (US$30,000) and has received a scholarship worth US$10,000 then the margin money requirement is covered by showing proof of the scholarship.
 
Processing Fees on Student Loans

Nationalised banks do not charge any processing fees or charges on loans for studies in India. However, these banks may charge a processing fee for considering loans for studies abroad. This fee may be refunded upon the loan approval. Private banks charge around 2 percent of the loan amount in processing fees - this may be negotiable.
 
Loans for studying further

Banks may consider further loans to students pursuing advanced studies - starting during the moratorium period of the first loan – and after the proper completion of the undergraduate degree for which the first loan was taken out. The repayment of the top-up loan will commence after the completion of the second course.

What happens after a Loan is approved?

Once the loan is given the green light, it is disbursed in stages according to the stated needs of the student. It is all sent directly to where it needs to go.
 
Tax Benefits on Educational Loans

Repayment of an education loan taken for full-time study is deductible under section 80E of the Income Tax Act. The yearly limit for deduction is Rs. 40,000 (for both the principal and the interest), which is available for a maximum period of eight years after starting repayment.

• Completed loan application form
• Proof of university admission (an official acceptance letter will work – but it must indicate the course you have been accepted into)
• Grade reports/Exam mark sheets from high school
• Test Scores: TOEFL/SAT/GRE/GMAT etc (if required for the course)
• Proof of Scholarship, if secured.
• Proof of employability post education (ie. are you studying Computer Science? Provide evidence of what kind of jobs, average salary, and where you may legally be able to obtain a job post university).
• Statement of course related expenses
• Visa approval papers
• Travel documents (if necessary; and also a photocopy of your passport)
• Bank Account statement; for the past six months                                                  
• Details for the co-borrower (and their passport photos; id card proof; bank account statement for the past six months)
• Statement of Assets and Liabilities of the Student or guardian
• Proof of Parents Income
• Income tax returns for the past two years
• Passport size photographs