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How to choose the best education loan

Last updated on: June 9, 2012 12:00 IST

How to choose the best education loan

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Anil Rego

Keep these five things in mind when you approach a bank for money to finance your education.

Education loans have made life easier; it is one of the popular means to fulfill academic dreams these days. Education costs have become extremely expensive and often even after planning appropriately, one tends to fall short of funds.

There are numerous options to choose from in case one is looking for education loans. However, there are a few parameters that one should consider whilst choosing an education loan. Here's a top list of things that one should compare across various options before finalising on the most appropriate option:

1. Eligibility for loan

Most courses in India / Abroad offered by recognised educational institutions, qualify for loan, however, it makes sense to check with popular banks on the eligibility to avail loan, even before you embark on the procedure to apply for the course. Further, most banks have a maximum loan amount that is extended -- typically for studying in India, the maximum limit could be around Rs 10 lakh (this could vary from bank to bank and on a case-to-case basis); the maximum limit for studying abroad could be up to Rs 20 lakh.

For loans up to Rs 4 lakh, one normally does not require pledging any collateral, co-obligation of parents / guardian would be enough. For loans exceeding this amount, the bank could call for 5 per cent to 15 per cent margin for safety purposes. For domestic studies, the margin amount could be lower as compared to overseas education.


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2. Fees, tenure and moratorium

Like any other loan, education loans too come with their baggage: they have processing fees, administrative fees, documentation costs etc.

The tenure of education loan could range from three to seven years. The moratorium period or the gestation phase (the period wherein one need not pay the EMIs) is often equivalent to one year in addition to the course period or six months after getting job, whichever is earlier.


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3. Interest rates and their chargeability

The primary factor that one should be looking at whilst choosing an education loan is the interest rate. Like other loans, here too there is the option of floating rate / fixed rate. Depending on ones outlook towards interest, one could choose the rate that is appropriate.

If one anticipates interest rates to take a downward turn in the coming years, then one should opt for the floating rate interest rate, on the contrary if one expects it to move up, one should go for the fixed rate. If the tenure is close to seven years, then it is highly likely that one would see both up-down cycles of the interest rates.


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4. Understand pre-payment charges

In all likelihood, you may end up with a well paying job at the end of the course. You may also want to rid yourself of the loan liability that you are now required to lug around with. Most of the other loans have a pre-payment penalty clause built in (recently waived off in case of home loans) and one should diligently check regarding this clause.


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5. Documentation and eligibility of individual

Alongside a duly filled application, the bank would call for the following documents: passport size photos, address proof, age proof, copy of the mark sheets of the qualifying examination, course admission letter, course fee which is shown in prospectus and guardian's / parents' income proof.

An individual planning to borrow should be an Indian national, between 16 to 26 years age. The co-obligator in the loan should have a steady source of income and the ability to repay in case of default from the primary party (the student in this case) and the course should be recognised by the Government.

Choosing an education loan could be a tricky affair, it would do some good to do your homework and also check with the educational institutions, if they have any tie-ups, because this could in the least help one to reduce paperwork significantly.


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Anil Rego is the founder and CEO of Right Horizons , an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.