The rising cost of education means that funding requirements have increased. According to data from GrayQuest, an education fintech company, the average Indian household spends 13 percent of its annual income on higher education fees per child. So, if you have two children, 26 percent of the annual income goes towards financing the education.
“With rising higher education fees and the growing aspirations of parents in their choice of education for their children, paying education fees is now a significant expenditure for most households,” says Rishab Mehta, Founder and CEO, GrayQuest. The COVID-19 pandemic has further increased the financial burden on parents, and so they are looking for education loan options, he says.
According CRIF High Mark, in financial year 2016-17, around 2.98 lakh students took education loans; the figure has increased to 3.09 lakh students in financial year 2019-20. This includes education loan disbursals from public sector banks, private banks, a non-banking finance company (NBFC) and others (includes fintechs).
Neeraj Sinha, Head -Retail and Consumer Banking, SBM Bank India says, “Education, the world over has been considered to be the passport to a better life. In our country, education is the most important investment and not a mere expense (loan) for each and every parent.” Therefore, there is a steady rise in education loan disbursals over the past four years.
Public sector banks are top lenders
According CRIF High Mark analysis, public sector banks are the top lenders of education loans by volume in annual disbursements, observed over the past 4-5 years. “The core reason is the lower rate of interest and liberalised terms and conditions as compared to NBFCs and fintechs,” says a spokesperson of Union Bank of India. For instance, the interest rate on education loans from Union Bank of India, Bank of Baroda and State Bank of India are 6.8 percent, 6.85 percent and 6.90 percent, respectively. Private banks – HDFC Bank, Axis Bank and ICICI Bank – charge 9.55 percent, 9.70 percent and 10.50 percent, respectively.
HDFC Credila Financial Services fixes rates linked to the HDFC Credila's Benchmark Lending Rate (CBLR) plus a spread (determined on the risk profile of loan applicant). Currently the CBLR is 12.05 percent per annum. “The rate of interest offered by the banks is always lower than the rate offered by NBFCs and fintechs. In fact, most of the non-deposit taking NBFCs borrow from banks for onward lending and thus add their margin,” says a spokesperson from Union Bank of India.
The maximum repayment tenure offered by banks such as Bank of Baroda and Union Bank of India is 15 years (after the moratorium period) irrespective of the quantum of the loan. Most NBFCs and fintechs don’t provide education loans for such a long tenure.
NBFCs provide ease in loan processing compared to banks
“NBFCs have a faster process in place compared to banks for processing loans. But, bear in mind that most of these education loans are secured against a collateral,” says Gaurav Gupta, Co-founder and CEO of MyLoanCare.in.
Traditionally, banks have been sanctioning loans only after admission confirmation. But, there are NBFCs for instance, HDFC Credila, which offer pre-approved education loan to students, i.e., even before you start applying to universities.
“Banks usually ask for margin money, need multiple visits to the branch to complete the application process and usually take a longer time to process the loan compared to NBFCs and fintech lenders. Banks also offers much lesser flexibility while evaluating a loan and can sometimes ask customers to have a savings account with them,” says Arijit Sanyal, MD and CEO of HDFC Credila Financial Services. Some of the banks have even made it mandatory to apply for life insurance equal to the loan amount from the bank. The insurance premium is included in the education loan.
Also, you get higher value education loans from NBFCs for vocational, off-beat and new-age courses such as sports event management, bachelor of media arts, Masters of Science in service design. Union bank of India offers education loan only up to Rs 1.5 lakh for vocational or skill development courses for durations ranging from two months to three years.
“Based on the merit of the student, banks can stretch the loan disbursement amount. For instance, we extend education loans even above Rs 1crore for studying abroad depending upon the college reputation and students merits,” says Harshadkumar Solanki, Head - Mortgages and Other Retail Assets, Bank of Baroda.
The pandemic’s impact
The pandemic has impacted economies and the employment scenario across the world. Many countries have altered their visa and work permit norms and universities have revised their admission norms. “Changes such as these have impacted the employability and repayment capacity of the student post course completion. So, now many financial institutions seek stronger co-borrower profiles, insist on collateral and stringently evaluate the application keeping the current changes in the overall economic scenario,” says Sanyal.
What borrowers should do?
Taking an education loan shouldn’t be based on interest rates alone. “While the rate of interest is a primary factor for taking loans, borrowers should also consider margin amount, repayment tenure and the moratorium period while applying for an education loan from any bank, NBFC or Fintech,” says Solanki.
“Evaluate the loan offered by banks and NBFCs with collaterals against non-collateral loans offered by fintechs,” says Eela Dubey, Founder of EduFund, an investment advisory app focused on higher education. She adds, you must plan for your children’s education early and invest enough to reduce the debt of education loans. Ideally, with long-term planning and a disciplined approach, the education loan should just be 25 to 30 percent of the overall fees.Also, before applying for an education loan, you must check whether the bank, NBFC or fintech calculates the interest amount on reducing balance or on flat rate basis. “Interest calculation on reducing balance can considerably reduce the effective interest rate,” says Sanyal.