How Education Loans Work in India

Getting higher education in India has become expensive over the years. Many students dream of studying in top colleges or going abroad, but money becomes a big problem. This is where education loans help. These loans make it possible for students to pay for their studies without putting too much burden on their families.

Table of Contents

What is an Education Loan?

An education loan is money that you borrow from a bank or finance company to pay for your studies. You can use this money to pay for college fees, books, laptop, hostel charges, and even travel costs. The best part is that you don’t have to start paying the money back right away. You can wait until you finish your course and get a job.

Think of it like borrowing money from a friend, but with some rules. The bank gives you money now, and you promise to pay it back later with some extra money called interest.

How Much Money Can You Get?

In India, you can borrow anywhere from Rs 1 lakh to Rs 1 crore for your education. The amount depends on:

What course you want to study
Which college you are going to
Whether you are studying in India or abroad

For studies in India, most banks give up to Rs 10 lakh without asking for any security. For studying abroad, you can get up to Rs 20 lakh or even more.

Key features of the Government of India’s education loan scheme, including low interest rates, moratorium period, and funding.

Types of Education Loans

There are different types of education loans based on where you study and what you need:

Based on Location:

Domestic loans – For studying in India
Overseas loans – For studying in other countries

Based on Course:

Undergraduate loans – For bachelor’s degree courses
Postgraduate loans – For master’s degree courses
Professional course loans – For courses like engineering, medicine, MBA

Based on Security:

Loans with collateral – Where you need to give property or assets as security
Loans without collateral – Where no security is needed

Who Can Apply for an Education Loan?

To get an education loan in India, you need to meet certain conditions:

You must be an Indian citizen
Your age should be between 16 to 35 years
You should have at least 50% marks in your last exam
You must have admission in a recognized college or university
You need a co-applicant (usually parents) who has regular income

The co-applicant is very important because they promise to pay back the loan if you cannot pay.

Documents You Need

When applying for an education loan, you need to submit several papers. Here’s what you need:

Student Documents:

Admission letter from college
Mark sheets of 10th, 12th, and graduation
Entrance exam results (like JEE, CAT, NEET)
Identity proof (Aadhaar card, passport)
Address proof
Passport size photos

Parents/Co-applicant Documents:

Salary slips for last 3 months
Income tax returns for last 2 years
Bank statements for last 6 months
Identity and address proof

For Business Owners:

Business registration papers
Profit and loss statements
Tax returns
Bank statements

Flowchart showing the step-by-step process of bank loan approval and disbursement, illustrating stages from application to loan disbursement edrawmax.wondershare

How to Apply for an Education Loan

Getting an education loan is not too difficult if you follow these steps:

Step 1: Choose a Bank
Research different banks and compare their interest rates, processing fees, and repayment terms.

Step 2: Fill Application Form
Complete the loan application form with all your details. You can do this online or visit the bank branch.

Step 3: Submit Documents
Provide all the required documents. Make sure everything is complete to avoid delays.

Step 4: Bank Review
The bank will check your documents, verify your details, and may call you for an interview.

Step 5: Loan Approval
If everything is okay, the bank will approve your loan and give you a sanction letter.

Step 6: Get Your Money
Once approved, the bank will directly pay your college fees. They don’t give cash to students.

Interest Rates and Costs

Education loan interest rates in India vary from bank to bank:

Government banks: 7% to 12% per year
Private banks: 10% to 16% per year
Special government schemes: As low as 4% per year

The interest rate depends on several things:

Which bank you choose
How much money you borrow
Whether you provide collateral security
Your academic record

Most banks also charge a small processing fee, but many government banks don’t charge anything for top college students.

What is Collateral Security?

Collateral security means giving something valuable to the bank as a guarantee. If you cannot pay back the loan, the bank can sell this item to get their money back.

Types of Collateral:

House or flat
Land (not for farming)
Fixed deposits
Life insurance policies
Government bonds

Importance of collateral security in educational loans, highlighting risk mitigation, lender assurance, and favorable loan terms studyinfocentre

When Do You Need Collateral?

For loans above Rs 7.5 lakh, most banks ask for collateral
For top colleges (IITs, IIMs), some banks give up to Rs 40 lakh without collateral
For studying abroad, higher amounts usually need collateral

Moratorium Period – The Grace Time

One of the best things about education loans is the moratorium period. This is the time when you don’t have to pay any money back to the bank.

How Long is This Period?

Duration of your course + 6 months to 1 year after finishing
For example, if you do a 2-year MBA, you get 2.5 to 3 years before starting payments

What Happens During This Time?

You don’t pay any EMI (monthly installments)
Interest keeps adding to your loan amount
You can focus on your studies without worry
After getting a job, you start paying back

Some banks allow you to pay only the interest during this period, which reduces your total loan burden.

EMI Calculation – How Much Will You Pay Each Month?

EMI stands for Equated Monthly Installment – the fixed amount you pay every month.

EMI Formula:
EMI = [P x R x (1+R)^N] / [(1+R)^N-1]

Where:

P = Principal amount (loan amount)
R = Rate of interest per month
N = Number of months

Education loan EMI calculation chart showing yearly principal, interest, total payment, balance, and loan paid percentage from 2018 to 2037 in Indian Rupees emicalculator

Example:
If you borrow Rs 10 lakh at 12% interest for 5 years:

Monthly EMI = Rs 22,244
Total amount paid = Rs 13.35 lakh
Total interest = Rs 3.35 lakh

Repayment Options

Banks give you different ways to pay back your education loan:

Option 1: Simple Interest
Pay only interest during study period, then start full EMI after getting job.

Option 2: Partial Interest
Pay some interest during studies, rest gets added to loan amount.

Option 3: No Payment
Don’t pay anything during studies, all interest gets added to principal amount.

Option 4: Full EMI
Start paying full EMI immediately (rarely chosen by students).

You can take up to 15 years to repay your loan after the moratorium period ends.

Tax Benefits – Save Money on Taxes

The government gives tax benefits to help students with education loans:

Section 80E Benefits:

You can claim deduction on interest paid
No limit on deduction amount
Available for 8 years from when you start paying
Only interest payments qualify, not principal amount

Who Can Claim:

Students who took the loan
Parents who are paying the loan
Must be for higher education only

This means if you pay Rs 50,000 as interest in a year, you can reduce your taxable income by Rs 50,000.

Government Help and Subsidies

The Indian government has special schemes to help students from poor families:

Central Sector Interest Subsidy Scheme:

100% interest subsidy during moratorium period
For families earning less than Rs 4.5 lakh per year
Available for technical and professional courses

State Government Schemes:

Gujarat: 100% interest subsidy for families earning less than Rs 6 lakh
Other states have similar schemes

NBCFDC Loans:

4% interest for boys, 3.5% for girls
Maximum Rs 10 lakh for India, Rs 20 lakh for abroad

Courses Covered Under Education Loans

You can get education loans for many types of courses:

Undergraduate degrees (B.Tech, B.Com, B.Sc)
Postgraduate degrees (M.Tech, MBA, M.Sc)
Professional courses (Medicine, Engineering, Law)
Diploma courses
PhD programs
Skill development courses
Vocational training

The course must be from a recognized university or college approved by UGC, AICTE, or other government bodies.

Tips for Getting Your Loan Approved

To increase your chances of getting an education loan:

Academic Performance:

Maintain good grades (minimum 60% marks)
Score well in entrance exams
Choose recognized colleges

Financial Planning:

Have a co-applicant with steady income
Keep all documents ready
Show clear repayment capacity

Choose the Right Bank:

Compare interest rates
Check processing time
Look for special schemes

Documentation:

Submit complete and correct documents
Provide additional papers if asked
Keep copies of everything

Common Problems and Solutions

Many students face these issues when applying for education loans:

Problem 1: Loan Rejection

Solution: Improve academic scores, find a better co-applicant, or try different banks

Problem 2: High Interest Rates

Solution: Compare multiple banks, consider government schemes, or provide collateral

Problem 3: Slow Processing

Solution: Submit complete documents, follow up regularly, consider online lenders

Problem 4: Collateral Requirements

Solution: Look for banks offering loans without collateral, or consider smaller loan amounts

Things to Remember

Before taking an education loan, keep these important points in mind:

Plan Your Career:
Choose courses that have good job opportunities so you can repay the loan easily.

Understand All Costs:
Know the interest rate, processing fees, and other charges before signing.

Read the Fine Print:
Understand all terms and conditions, especially penalty charges for late payment.

Keep Documents Safe:
Maintain copies of all loan papers as you’ll need them throughout the repayment period.

Start Paying Early:
If possible, start paying interest during the moratorium period to reduce total loan burden.

Education loans have made higher education possible for millions of Indian students. With proper planning and understanding of how these loans work, you can achieve your educational dreams without financial stress. Remember to compare different options, understand all terms, and choose the loan that best fits your needs and repayment capacity. The key is to borrow only what you need and have a clear plan for paying it back after completing your studies.