Till few years back, educational loan used to be saviors for those who did not want financial constraints to come in way of their children's education. But with sky-high cost of education these days, it's a very normal thing to fund education by taking education loan.
The major differences between an education loan and any other loan are the comparatively lower interest rates and option to defer repayment (under moratorium). Though these loans come under Priority Sector lending requirements for the banking sector, the financial institutions still do their due diligence before giving out these loans.
As far as the borrower (student) is concerned, the financial institutions evaluate the following criteria quite comprehensively:
His/her past academic record
Quality and reputation of institute from where the student wants to pursue the chosen course
Ability of student to get job after course completion
Expected salary after course completion (used to calculate eligibility of loan amount)
Credit history of co-applicants
It is worth noting that financial institutions do not lend for each and every course that is on offer. Governing entities like UGC, Ministry of Education, etc. should duly recognize the course as well as the institute, before the financial institutions are willing to even consider the application to the chosen course/college.
Generally, financial institutions are willing to lend upto Rs 15 lacs for courses in India and Rs 30 lac for those abroad. But financial institutions may demand collateral from borrowers if loan amount exceeds Rs 4 lacs.
Many financial institutions ask students (and co-borrowers) to put in the margin money. It is the difference between the amount applied for and the amount disbursed by the bank. It varies from bank to bank and is generally between 5% and 15% of the loan amount. Small loans upto Rs 4 lacs do not require any margin money from the borrowers. The interest rates vary from 11% to 15% depending on loan amount, tenure, institute, etc. It is worth saying that costs processing fees, prepayment fees, etc. should also be evaluated and negotiated before finalizing the loan.
The tenure of education loans/student loans range from 5 to 7 years. But the same is extendable under certain conditions. The best part about these loans is that borrower does not need to start repaying the loan till the completion of course. This is what is known as the Moratorium period of loan. Once repayment starts, the borrower can also claim tax benefits on the amount being repaid.
Education loans are really useful to overcome financial constraints when it comes to funding education. However one should make sure to evaluate all above discussed factors before finalizing the loan amount and the bank.