EDUCATION LOAN SCHEME IN INDIA AND ITS BENEFITS

 Education loan scheme is formulated by banks under the directions of RBI/Government, to help the needy students. Aware of significant benefits from education loan scheme, millions of students approaching banks for education loan every year. Besides financial assistance from banks for pursuing higher education, the education loan borrowers are benefitted by deductions under income tax acts for interest paid on education loan. Further, simple interest charged on loan amount during the study period and up to the commencement of repayment of the loan. Banks allow 1% interest concession if interest is serviced during the study period and subsequent moratorium period prior to the commencement of repayment.

Income tax benefits

An individual can claim an income tax deduction on interest paid on education loan availed for self, spouse or his/her children u/s 80 E of I.T. Act.  The guardian appointed by the court for a minor student is also eligible for an income tax deduction on interest paid on education loans under the same section. One more benefit is that there is no upper limit for claiming deduction either on the amount of interest paid or the rate of interest paid. The deduction can be claimed up to 8 years or closure of the loan whichever is earlier. If the interest is paid during the moratorium period, the time limit of 8 years begins from the date of the first repayment of interest on the loan.  However, the tax benefit is restricted for education loans availed from the bank, notified financial or charitable institutions. The education loan availed from the employer, family, and friends does not come u/s 80E. The deduction under section 80E is also allowed for education loans availed for studies abroad.

Who is eligible for an education loan?

Students of Indian nationals from all fields of studies (including vocational studies) pursued after passing the Senior Secondary Examination or its equivalent from any school, board or university recognized by the Central Government or State Government or local authority or by any other authority authorized by the Central Government or State Government or local authority to do so. The education loan can be availed by students who get admission to higher education either in India or abroad. The existence of an earlier education loan to the brother(s) and/or sister(s) will not affect the eligibility of another meritorious student from the same family obtaining the loan under the education loan scheme. There is no specific restriction with regard to the age of the student to be eligible for an education loan. However, if the student was a minor while the parent executed documents for the loan, the bank will ask a letter of ratification from him/her upon attaining majority

Which are the approved courses for education loans?

There are many approved courses eligible for education loans. The degrees or diplomas conducted by recognized colleges/ universities recognized by UGC/ Govt./ AICTE/ AIBMS/ ICMR/ ICWA/ CA/ CFA  IIMs/ IITs/ IISc/ XLRI/ NIFT/NID are eligible for education loans by the commercial banks. The other regular Degree/Diploma courses like Aeronautical, pilot training, shipping, degree/diploma in nursing or any other discipline approved by Director General of Civil Aviation/Shipping/Indian Nursing Council or any other regulatory body as the case may be are also eligible for education loans if the course is pursued in India. The admission to the above institutions ought to be through the entrance test or merit-based selection after completion of HSC (10 plus 2 or equivalent). However, entrance test or selection entirely based on marks obtained in qualifying examination may not be the norm for admission to some of the postgraduate courses or research programs. In such cases, banks may accept appropriate criteria based on the employability and reputation of the institution concerned. Students, who qualify for a seat under merit quota, can be considered for education loan to pursue a course under Management Quota. However, the implementing bank will have their discretion in the matter.

Banks also lend to students under the education loan scheme for studies abroad.  The courses like MCA/MBA/MS/CIMA-London/CPA in the US have approved courses offered by reputed universities abroad.  The Degree/diploma courses like aeronautical, pilot training, shipping, etc., can be pursued abroad, provided these are recognized by competent regulatory bodies in India/abroad.

What is the quantum of finance available from banks?

Need-based finance will be provided by the banks depending upon the repayment capacity assessed by the bank after the student getting job and margin brought by the student to meet the expenses. In any case, the loan will not exceed ₹ 10 lakhs for studies in India and ₹ 20 lakhs for studies abroad, for treating the loan as priority sector lending. Banks may consider the higher quantum of the loan on course to course basis (eg: courses in IIMs, ISB, etc). It may also be noted that even loans in excess of ₹10 lakhs qualify for interest subsidy under Central Sector Interest Subsidy Scheme, for loan amount up to ₹10 lakhs.

In terms of education loan schemes, banks do not stipulate margin condition for loan sanctioned up to ₹ 4 lakhs. However, a minimum of 5% and 15% margin will be respectively asked for studies in India and abroad. The margin may be brought in on the year-to-year basis as and when disbursements are made on a pro-rata basis. Scholarship assistance received by the candidate may be included as a margin.
Which are the expenses considered for the sanction of loans?
The expenses of the student during his/her study period like tuition fee, hostel fee, Examination fee, Library fee, Laboratory fee, Travel expenses, passage money for studies abroad, the Insurance premium for student borrower,   Caution deposit, Building fund, refundable deposit supported by Institution bills/receipts, Purchase of books, equipment, instruments, uniforms, Purchase of the computer at a reasonable cost, if required for completion of the course and any other expense required to complete the course – like study tours, project work, thesis, etc., are considered for education loan. For those students who got admission for courses under Management quota seats, expenses considered as per fees approved by the State Government/Government approved regulatory body. Many banks consider loan amounts for reasonable lodging and boarding charges not exceeding 10% of the total tuition fees for the entire course.

What security to be offered for education loans?

Under the education loan scheme, banks do not demand security for loans up to ₹ 4 lakhs but parents/guardians shall stand as joint borrower(s) with the student. In the case of a married person, the joint borrower can be the spouse or the parent(s)/parents-in-law. For, loans sanctioned between   ₹ 4 lakh and ₹ 7.5 lakhs, banks third-party guarantee is required, in addition to the joint borrower (s) with the student. The banks at their discretion, in exceptional cases, may waive third party guarantee if they are satisfied with the net-worth/means of parent/s who would be executing the document as joint borrower(s). For loan amount above Rs. 7.5 lakhs, in addition to above conditions like the parent(s)/ guardian to be joint borrower(s) with the student, banks insist tangible collateral security of suitable value acceptable to the bank, along with the assignment of future income of the student for repayment of loan installments. The security can be in the form of land/ building/ Govt. securities/ Public Sector Bonds/Units of UTI, NSC, KVP, etc. Life insurance policies, gold, shares, mutual fund units, debentures, bank deposits, or any other security in the name of student/ parent/ guardian / any other third party can also be offered as security.  The security norms are uniform for all the banks.

What will be the Repayment/ holiday/Moratorium Period?
Education loan availed by the students shall be repaid after course period+1 year or 6 months after getting the job, whichever is earlier. If the student is not able to complete the course within the scheduled time; the extension of time for the completion of course; maybe permitted for a maximum period of 2 years. Interest servicing of interest during the study period and the moratorium period is optional for students. As per existing norms, banks allow 1% interest concession, if interest is serviced during the study period and subsequent moratorium period prior to the commencement of repayment. Accrued interest will be added to the principal amount borrowed while fixing EMI for repayment. In case the student discontinues the course midway, an appropriate repayment schedule will be worked out by the bank in consultation with the student/parent. The education availed up to ₹7.5 lakhs shall be repaid within a maximum repayment period of 10 years. For loans beyond ₹7.5 lakhs, the repayment period can be extended up to 15 years. Banks may consider top-up loans to students pursuing further studies within the overall eligibility limit, if such further studies are commenced during the moratorium period of the first loan, the repayment of the loan will commence after the completion of the second course and further moratorium period.

What is a Capability Certificate and to whom banks issue such certificate?

Some of the foreign universities need the students to submit a certificate from their bankers about the sponsors’ solvency/ financial capability, with a view of ensuring the sponsors of the students going abroad for higher studies are capable of meeting the expenses till completion of studies.
Banks issue such capability certificate for students going abroad for higher studies, after assessment of their financial capability based on supporting documents submitted to the bank.

ASSESSMENT OF EDUCATION LOAN AND ELIGIBILITY CRITERION FOR LOAN

A revised Model Educational Loan Scheme (2015) for Pursuing Higher Education in India & abroad was formulated by IBA and circulated to member banks for adaption and implementations vide IBA circular no. CIR/RB-ELS/6 dated 17th August 2015. The scheme provides broad guidelines to the banks for operationalizing the educational loan scheme and the implementing bank will have the discretion to make changes as deemed fit. Following features are the highlights of the revised Model Educational Loan Scheme.

1. Banks could use the rating of educational institutions and students as a tool for targeting student loans which would improve asset quality. For this purpose, banks are advised to classify the student loans into 3 categories viz. (i)  Loans to students admitted to top-rated institutions (rated institutions),  (ii) Loans to students admitted to other domestic institutions (unrated institutions) (iii) Loans to students seeking studies abroad.
2. The top-rated institutions could comprise of institutions given “A” rating by NAAC, or the institutions/courses equally rated by other recognized agencies and institutions or identified as top ranking by the banks themselves based on reputation, employability and track record of aluminous in repayment of loans. The guidelines suggest that the Banks may consider relaxed security norms and interest rates for the students belonging to top-rated institutions.
3. Banks may continue to use Standard norms of model education loan scheme formulated by IBA for those students getting admission in institutions other than top-rated institutions.
4. The assessment norms, terms of sanction and security to the loan for students who take up studies abroad, could be different. Postgraduate studies leading to PG degrees and PG diplomas offered by reputed institutes/universities only will be covered by the education loan scheme. Studies abroad for Diploma courses and certificate courses have not been included as eligible courses for the scheme. Loan to students for studies abroad is normally released only against collateral security offered by the borrower/guarantor to match the loan amount.
5. Banks are permitted to fix the cap on stream-wise and institutional wise limits for lending under the scheme.
6. Uniform one year moratorium period prescribed for all the study loans under the revised scheme.
7. Uniform extension of repayment period (after moratorium) up to 15 years for all loans should be implemented. The repayment period has been increased to give greater comfort to the borrower students enabling repayment of the loan out of their future earnings. However, no prepayment charges are to be levied in case persons who would like to close the loan faster.
8. Margin: up to Rs.4 lakhs: NIL, above Rs.4 lakhs Studies in India: 5%, Studies Abroad: I5%. Margin may be brought-in on a year-to-year basis as and when disbursements are made on a pro-rata basis. Scholarship/ assistantship shall be included in margin.
9. Rate of Interest: Individual Banks have the discretion to make provisions for charging of differential interest rates based on the status of collateral, employability, and reputation of students. Nevertheless, it is proposed to continue with 1% interest concession for servicing of interest during the study/moratorium period. It is also likely that the banks will charge relatively lower rates for loans up to ₹ 4 lakhs and continue concessions hitherto being given to girl students.
10. Security: The assignment of future income of the student for payment of installments shall be obtained. Bank may stipulate tangible collateral security of suitable value based on the loan amount required. The security can be in the form of land/ building/ Government securities/ Public Sector Bonds/Units of UTI, NSC, KVP, life policy, gold, and shares/mutual fund units/debentures, bank deposit in the name of student / parent / guardian / any other third party or any other tangible security acceptable to the bank with suitable margin. Wherever the land/ building is already mortgaged, the unencumbered portion can be taken as security on the second charge basis provided it covers the required loan amount.
11. The existing practice of taking parents as co-borrowers may be continued at the discretion to the banks and also they may waive the condition in special cases. The loan documents should be executed by the student and the parent/ guardian as joint-borrowers.
12. Banks may consider relaxation in margin and security for loans guaranteed by National Credit Guarantee Trustee Company Limited (NCGTC). Loans up to Rs.7.50 lakhs are eligible for credit guarantee coverage provided loan is extended without collateral or third-party guarantee.
13. Expenses considered for loan: Entire amount of tuition fee*, Examination/ Library/ Laboratory fee/ Insurance premium for student borrower,(if applicable) and hostel fee are considered as eligible for a loan. For studies abroad Travel expenses/ passage money are also eligible for a loan. Reasonable lodging and boarding charges will be considered in case the students opt for outside accommodation. Caution deposit, Building fund / refundable deposit supported by Institution bills/receipts, etc. will be considered subject to the condition that the aggregate amount does not exceed 10% of the total tuition fees for the entire course.         Purchase of books/ equipment/ instruments/ uniforms/ Purchase of computer at a reasonable cost, if required for completion of the course/ any other expense required completing the course – like study tours, project work, thesis, etc., may be considered for the loan. However, the above expenses may not be available in the schedule of fees and charges prescribed by the college authorities. Therefore, a realistic assessment may be made of the requirement under these heads and the aggregate expenses included under all these expenses may be considered with a cap at 20% of the total tuition fees payable for completion of the course.                                    *Fee payable to the college, for courses under Management quota seats considered under the scheme. Fees, as approved by the State Government/Government, approved regulatory body for payment seats will be taken, subject to viability of repayment.

14. The eligibility criterion for loan: The student should be an Indian National. He/ She Should have secured admission to a higher education course in recognized institutions in India or Abroad through Entrance Test/ Merit Based Selection process after completion of HSC (10 plus 2 or equivalent). However, entrance test or selection purely based on marks obtained in qualifying examination may not be the criterion for admission to some of the postgraduate courses or research programs. In such cases, banks will have to adopt appropriate criteria based on employability and reputation of the institution concerned. Further, it would be in order for banks if they consider a meritorious student (who qualifies for a seat under merit quota) is eligible for loan under this scheme even if the student chooses to pursue a course under Management Quota.

15. Approved Courses: IBA has provided an indicative list of courses to its member banks to serve as guidance on courses and approving authorities for various courses, which fall within the definition of higher studies. The list contains approved courses leading to graduate/ post-graduate degree and PG diplomas conducted by recognized colleges/ universities recognized by UGC/ Government/ AICTE/ AIBMS/ ICMR etc. Courses like ICWA, CA, CFA, etc. Courses conducted by IIMs, IITs, IISC, XLRI. NIFT, NID, etc. Regular Degree/Diploma courses like Aeronautical, pilot training, shipping, degree/diploma in nursing or any other discipline approved by Director General of Civil Aviation/Shipping/Indian Nursing Council or any other regulatory body as the case may be if the course is pursued in India. In addition to the above-approved courses offered in India by reputed foreign universities are also treated as an approved course. For graduation studies abroad, job oriented professional/technical courses and for post-graduation MCA, MBA, MS, etc. offered by reputed Universities are considered. Courses conducted by CIMA- London, CPA in the USA, etc. and Degree/diploma courses like aeronautical, pilot training, shipping, etc. are also considered for the loan provided these are recognized by competent regulatory bodies. Banks are asked to individually decide on the courses for which they will be giving student loans based on employability and consequent ability to repay the loan. Therefore, banks are also advised to prepare and publish a list of eligible courses the bank would consider for sanctioning of student loans.

16. Assessment of the loan: Though the model scheme is aimed at meeting all study expenses of a student required to complete the studies undertaken, assessment of employment potential or future prospects is very important criterion considering the higher cost of studies involved. This is in view of fees structures of Government colleges/institutions /aided colleges and private colleges/institutions are different, therefore, banks are asked to consider approved fee structure for merit quota seats in all colleges/institutions in a specific state subject to the condition that the bank is satisfied with repayment prospectus of employment. For this purpose of evaluations, banks may introduce a system of assessment through average salary offers, etc. received by the students in the past for the specific course. The above information may be collected from the colleges/institution (from where most loan applications are received), regarding the percentage of job offers to final year students via campus placement. Further, it would be necessary to take into account the scholarships/concession, etc. if the student is entitled to, before fixing the limit for sanction. If the scholarship amount was not netted off while fixing the quantum of loan, banks should ensure that the scholarship from government or any other sources is credited to the loan account.

17. Credit Monitoring: The IBA guidelines suggest that bank branches nearest to the residence of parents to consider the loan application for better tracking of students during and after the study period. Banks are; however, free to adopt different norms to suit their business plans. The lenders have to effectively co-ordinate with the educational institutions to provide placement details and in some cases, alumni forums of educational institutions can also give valuable feedback. Many banks obtain PAN and Aadhaar details for the purpose of future tracking. The guidelines prohibit the submission of above details as pre-conditions for sanction of loan. This is in view of students may not require PAN during that stage. However, suitable clauses may be included in the sanctioned letter so that banks may obtain the PAN as well as Aadhaar for their record before the student completes the full course of studies.