Factors Overlooked by Students When Choosing Education Loan Providers

For many students, getting an education loan is an essential first step on the path to a higher education. However, there are many little things to consider when selecting a loan provider, and these things can have a big influence on a person's financial situation and academic career. This blog seeks to clarify which factors students overlook when applying for a bank-issued education loan.

The path to both professional and personal development is paved with higher education, but the cost is a major obstacle. Student loans for education act as a bridge, allowing them to pursue their academic goals. However, due to the intricacy of loan agreements and the variety of loan providers, it is simple to overlook important details. A commonly disregarded element that students fail to take into account when obtaining an education loan from a particular bank highlights the necessity for a more thorough comprehension of these financial instruments. 

Loan amounts and interest rate

Borrowers' top concerns are loan amounts and interest rates, but a comprehensive assessment entails much more. Knowing the distinction between secured and unsecured loans as well as how interest rates affect loan amounts and interest rates is essential. 

Public banks typically offer the lowest interest rates due to their mandate to support education. But for loans over a certain amount, these banks frequently demand collateral, which can be a barrier for some students. The extensive documentation and verification process may cause the processing time to extend..

Private banks' interest rates are slightly higher than those of public banks, reflecting their commercial nature and the higher cost of funds. Even though they provide large loan amounts as well, their cap may be smaller than that of public banks. They also provide quicker processing times and don't require any collateral.

Non-Banking Financial Companies (NBFCs) usually have the highest interest rates among the three due to their higher cost of capital and greater risk appetite. NBFCs are renowned for their low documentation requirements and speedy processing.

Comparison Between Loan Amount and Interest Rates
 

Collateral requirements

One aspect that needs greater consideration is the collateral requirement for secured loans. While offering collateral puts the borrower's assets at risk, it can also significantly decrease interest rates. On the other hand, even though they are easier to obtain, unsecured loans from private lenders often have higher interest rates and more restrictive repayment terms. When students apply for education loans from a particular bank, they often overlook a critical aspect: lenders demand collateral that is worth at least as much as the loan amount.

Read to know the types of collateral accepted by lenders for an education loan.

Processing fees
 

Processing fee is often ignored but have a significant impact on the total cost of the loan. Lenders charge processing fees in order to cover the costs of processing loan applications. When applying for an education loan, processing fees are an important factor to take into account because they have a big impact on the loan's total cost. The difference in processing fees between private lenders and government banks can have a big impact on the borrower's overall cost of borrowing. This hidden expense emphasises how crucial it is to conduct in-depth study and comparison before making a choice.

Loan repayment

The student loan repayment terms can have a big influence on his or her financial status when the course ends. Terms such as complete moratorium periods that let graduates launch their careers before starting to repay their loans, are offered by public banks. For borrowers, this flexibility ought to be the main factor in managing their long-term financial health. Depending on the lender and loan type, there are differences in the loan repayment terms. Once a moratorium has been imposed, there are two choices.

1. Paying Simple/Partial Interest: The borrower is required to pay interest (whether in full or in part) only on the disbursed loan amount. Principal repayment starts after the moratorium period.

1. Full Moratorium Period: The parent/student is not required to pay interest. The interest during the period of study gets added to the loan amount, and the EMI (equated monthly installment) starts after the moratorium period (duration of the course plus 6 months or 1 year).

For loans without a moratorium period, the EMI starts immediately which can significantly burden the students if the repayment starts immediately after the course ends. Therefore, knowing the repayment terms before taking the loan is crucial, as a default in repayment can damage the credit rating significantly.

Education loan insurance

In any emergency, loan insurance acts as a safety net, guaranteeing that the borrower or their family will not be saddled with debt. Private lenders frequently require borrowers to opt for a loan insurance, adding another level of scrutiny for borrowers, even though government banks may provide incentives. Although often disregarded, this protection is crucial for thorough financial planning.

Tax savings

Section 80E of the Income Tax Act, allows a deduction of interest on education loans taken for the higher education of the individual, spouse, or children of the individual. The deduction is available without any limit. Therefore, the education loan can be applied for and repaid after considering the tax planning opportunities. But what students tend to ignore is that this tax benefit is only available for education loans via banks.
 

Selecting the ideal education loan provider is as crucial to your academic journey as choosing the right university. As you stand at the crossroads of your future, armed with dreams and determination, it's essential to navigate the financial aspects of higher education with wisdom and foresight. We have highlighted several critical, yet often overlooked, factors in choosing an education loan provider—ranging from understanding the nuances of loan amounts and interest rates to the implications of collateral requirements, the hidden costs of processing fees, the strategic importance of loan repayment terms, the security offered by loan insurance, and the potential for tax savings. 
 

Even though going for higher education is a path full of opportunities and challenges, the financial decisions you make now will have an impact on your life and career later on. Students who carefully weigh the points covered can set themselves up for a future in which their academic success is not eclipsed by debt. GyanDhan encourages you to approach us with diligence during this critical decision-making phase and select a lender who is in line with your financial situation and educational objectives. Recall that investing in your education is an investment in your future, and making wise decisions will set you up for success both inside and outside of the classroom. Together, we can turn those aspirations into reality by laying a solid financial foundation.