Published: Nov 21, 2022, 3:39pm
Interest rate in an education loan, like in any other personal loans provided by public and private sector banks, is key to determine the total amount you have to repay when the equated monthly installment (EMI) begins.
The policy repo rate hike by the Reserve Bank of India (RBI) in Sept. 2022 to 5.9% has led many banks to increase their interest rate on loans. As per the RBI, the average rate on 1-year MCLR, or the lowest lending rates, of scheduled commercial banks (SCBs) increased from 7.65% in Aug. 2022 to 7.75% in Sept. 2022.
Forbes Advisor India has put together a list of education loan interest rates currently offered by public and private sector banks of India for studies within the country and abroad to help you better understand the types of plan that would suit your personal finance needs.
The above interest rates and details on education loans are updated as on Nov. 17, 2022. While we update this information regularly, the rate of interest and loan details may have changed since the page was last updated.
Lending institutions provide different types of education loan and charge interest rates depending upon the students’ choice to study further, either at domestic colleges or abroad. Interest rates on education loans also vary upon lending institutions, loan amount, repayment tenure, borrower’s credit profile as well as aspirants’ select-course and the type of education institution offering the course, to name a few.
An interest rate fixed by the bank on an education loan plays a crucial role in one’s ability to pay the borrowed amount. Although banks do not ask you to pay the sum during the moratorium period or while you are studying, it is best to consider paying at least the interest amount during the period. Doing this will not only ease the burden of the EMI, but may as well help you get a certain concession on the principal loan amount later as per the bank’s policy.
Most public and private sector banks in India offer “floating interest rate” while lending an education loan. In this type of rate of interest (ROI), the interest rate on your easy EMI is calculated as per the “base lending rate” plus the standard premium rate, or credit spread, markup, etc.
Banks refer to base rate, with floating components like repo-linked loan rate (RLLR) or marginal cost of fund-based lending rate (MCLR), among others, while determining their actual interest rate on education loans.
Notably, the base rate for every bank changes as per the RBI’s change in repo rate (the rate at which the public and private banks borrow money from the apex bank), which is reviewed on a bi-monthly basis. Therefore, the interest rate in your floating EMI is revised as per the change in the RBI’s repo rate.
This change is, however, reflected after the “reset period” when the interest rate on your EMI is subjected to revisions. The reset period in the RLLR type of floating component is three months while it usually takes six to 12 months for the reset to take place in the MCLR concept of fixing the interest rate on your EMI.
In a nutshell: Final Interest Rate = Base Rate (MCLR/RLLR/Repo Rate) + Standard Premium/Spread per annum.
It would be best to consider this aspect of calculating floating interest rate before you choose an education loan for your further studies. Nonetheless, banks usually provide the breakdown of interest rates on your EMI against the outstanding amount in your education loan sanction letter.
Education loan eligibility determines the maximum amount a bank can borrow to an applicant, depending on the amount that you or your ward needs to cover the expenses. Here are some factors to consider:
Margin: Just like other retail loans, education loans require applicants to pay a portion of the total education cost, which can be around 5% for studies within India and 15% for abroad studies.
Collateral: Depending on banks, you may be required to pledge something as security for repayment of loan.
Moratorium period: Repayment for the loan or the equated monthly instalments (EMIs) will begin after the education course is complete. It is advised to pay atleast the interest amount during the course of study to reduce the repayment burden.
Tax deduction: The student or their cosigner can claim the interest portion of the loan for tax deductions under Section 80E of the Income Tax Act for up to eight years.
Rate of interest: The RoI is an important factor that determines how much you will pay when the EMI begins. Currently, major banks of India are offering education loans starting 8% for studies in India and 9% for studies abroad.
Remember, most banks offer concessions on the ROI (normally 0.25 to 0.50 bps) to meritorious students, female, scheduled caste, scheduled tribe, minority, and physically challenged students.
Processing charge on education loan: This charge is levied by the bank to process your application. While some banks do not charge any processing fee for studies within India, or women borrowers, the processing charge is the range between 0.50% to 1%.
Read the fine print. Education loans come with a set of terms and conditions. Make sure you avoid needless penalties and charges, it is advisable to go through the fine print before you sign any paperwork.
– Indian origin
– Proof of income (parents/sibling/guarantor)- Proof of identification
– Proof of address
– Bank statement of last six months
– Copy of admission letter of the institute along with fees schedule
– Demand letter from college or university
– Loan agreement/sanction letter/disbursement request form signed by applicant, co-applicants
– Documents for collateral security (if any)
– Form A2 signed by applicant or co-applicants for studies in overseas institute
– Mark sheets, or pass certificate
Yes — firstly, consider your relationship with your bank. Female/scheduled caste (SC)/scheduled tribe (ST) groups can also benefit from it. Then there are government schemes, tax exemption schemes, to name a few.
Although banks do not ask you to pay the sum during the moratorium period or while you are studying, it is best to consider paying at least the interest amount during the period.
An education loan covers the aspirant’s almost entire expenses of residing abroad and pursuing the degree, such as tuition fees, living expenses, conveyance charges, hostel charges, cost books, and other miscellaneous charges.
Yes, foreclosure is allowed and depending upon banks they may or may not levy pre-payment charges.
Yes–applicants who are applying for post-graduate courses and above can apply for an education loan without a co-applicant.
Yes–banks can increase the tenure if the course is extended by the university.
Dipen Pradhan is a Staff Reporter for Forbes Advisor India. He has more than 10 years of experience in journalism. He covers the personal finance beat. When he is not writing, he enjoys documenting the community’s ethnic knowledge, and travels to explore rural hotspots.
