IBA Model of Education Loan Schemes

    Updated on: 22 May 2022

     


    Education is the backbone of any society, and it is of utmost importance for the state to provide students with world-class education. When it comes to higher education, there is no dearth of students who are qualified to study at top institutions globally, and many are doing so too. The credit culture in India has been revamped with the joint effort of state and financial institutions. The Indian Banking Association (IBA) has been a pioneer in initiating borrower-friendly policies that will increase the number of students under education loans. When it comes to abroad education, the quantum of loan is multiple times more than the domestic education loans.

    So, it becomes very important for banks and other financial institutions to develop such a lending process that can make the abroad education loans affordable and on reasonable terms. With a concerted effort from all the stakeholders, now the banks are competing based on some common benchmarks that will give students access to loans on reasonable terms irrespective of the lender they choose. Considering all this, the IBA came up with the Model Education Loan Scheme in the year 2001, which banks implemented on the directions issued by the Reserve Bank of India. The Model Education Loan Scheme gives a broad set of guidelines that the banks can follow, but the implementation of the scheme is the discretionary power of the bank, and they can make changes accordingly as per their suitability.

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    Eligibility Criteria For the Model Education Loan Scheme

    The Eligibility criteria laid out in the Model Education Loan Scheme are not stringent, and there is a lot of discretion that is given to the banks. So, one mustn't conflate with the criteria laid out by individual banks, which will have variations when it comes to sanctioning loans.

    • The Student must be an Indian citizen.
    • The Student must have secured admission to a university abroad through an entrance test or anything equivalent to that.
    • Banks will have the option to exempt the criteria for the entrance test in certain postgraduate and research programs wherein the students aren't selected based on their performance in an entrance test.
    • The banks might consider an institution's reputation as a criterion for giving abroad education loans.
    • The course for which the Student has enrolled must be job-oriented professional/ technical courses offered by reputed universities, e.g., MBA, MS, etc.
    • Reputed organizations like CIMA- London, CPA in the USA, offer professional courses.

    Overview

    Now, we will discuss some crucial details about the education loan schemes that will have a direct bearing on the loan. Once you understand these terms and their implications on your loan, you will be better positioned to understand things—an informed choice by considering all the important factors that ward off the chances of being under a misconception.

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    Loan Amount

    The maximum loan amount for education abroad is suggested to be kept at such a level that students are neither under-financed nor over financed. A balance must be struck so that the aim of the IBA model education loan scheme can be achieved without adversely affecting the bank's finances. The maximum loan amount for abroad education is advised to be kept at INR 20 lakh, but the impetus is more on need-based financing. For instance, many Public Sector Banks (PSBs) tend to lend more for abroad education loans, while some might keep a low threshold. So, it's the bank's prerogative to decide the quantum of maximum loan they can give for abroad education.

    Banks have also been given the liberty to tweak the upper limit of loans depending on the reputation of the institution, the placement history, or other relevant factors.

    Margin Money

    Loan Amount

    Margin

    Up to INR 4 lakhs

    NIL

    Above INR 4 lakhs (for abroad studies)

    15%

     

    As per the latest amendment in the Model Education Loan Scheme, the margin for loans up to INR 7.5 lakhs is NIL. However, for the margin to be NIL, in this case, the loan must be eligible for a credit guarantee. Another crucial factor is that the margin must include the scholarship and assistantship if any. Banks have been given the discretion to bring the margin year-on-year whenever the disbursement is made pro-rata.

    Collateral Requirements

    There are three loan segments, and each of them has a different collateral requirement.

    • The first one is for loans up to INR 4 lakhs where there is no need for collateral.
    • The second type is for loans between INR 4 lakhs to 7 lakhs. The parents will be the co-borrower, and apart from that, there is a provision for having a third-party guarantee. However, banks are given the discretion to waive the requirement for the third-party requirement.
    • The third type is for loans beyond INR 7.5 lakh. In this case, there should be tangible collateral. The bank must be satisfied with the collateral valuation and can also consider the Student's income in the future.

     

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    Interest Rates

    The rate of interest varies from one bank to another. The model education loan scheme has tried to bridge the difference by formulating interest rates linked to base rates. Individual lenders decide the base rates, and the banks are given the liberty to vary it as per the type and valuation of collateral. Also, banks are allowed to charge varying interest rates for collateralized and uncollateralized loans. As per the scheme, simple interest must be charged during the study period and until the repayment starts. Students don't have to service the interest rate at the time of study or even during the moratorium period until the repayment process starts.

    Guidelines on Repayment

    There are different guidelines on the repayment of the loan, which vary on a case-to-case basis. There are scenarios wherein the banks might alter the moratorium period in case of an unforeseen situation or any other case where the banks see it fit to alter the moratorium period.

    • In usual cases, the repayment starts after the Repayment Holiday / Moratorium Course period + 1 year.
    • In the case of unemployment cycles, the bank might alter it, but it can only do it two or three times for six months at once.
    • The moratorium on repayment of principal and interest can be given to those students who wish to do a startup. But it can only be considered for two years.
    • An extension of up to 2 years can be provided if a student is unable to complete the course in time. If the reason for not continuing is beyond the control of the Student, then banks can use discretionary powers.
    • The repayment time duration is a maximum of 15 years.
    • An interest subsidy of 1% can be given if the interest is serviced timely during the study period and moratorium period.
    • No prepayment penalty in the repayment period.

    Processing Charges

    In abroad education loans, the banks might take some processing charge, but it should be refunded after the Student starts the course. However, this doesn't mean that any third-party charges will be waived.

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    Expenses Covered

    You can't miss expense coverage, as abroad education is way beyond the tuition fee. The cost of living and other expenses are significantly high when compared with domestic education. So, it's in the best interest of students to know the expenses that will be covered under the loan. You can also ask the bank to include or exclude some expenses that depend on the country you will be studying and the university/college.

    The following expenses are covered under the Model Education Loan Scheme:

    • The tuition fee for the course is payable to the university or college.
    • The examination or library or laboratory fees. It depends on the course for which you have applied.
    • The expense of traveling is also included since the amount runs into lakhs.
    • If you are planning to take insurance on the loan, then the payable interest is also included.
    • The Caution deposit, Building fund / refundable deposit as per the receipts from the university. However, it is to be capped at 10% of the total tuition fees.
    • The cost of the hostel will also be included, and if the students plan to stay outside the campus, then a reasonable amount can be a part of the expense.
    • The cost will also include the expense of books/equipment/ instruments/ uniform, purchase of a computer (if required for completion of course), study tours, project work, and thesis. But the combined value of all these expenses will be subjected to a cap of 20% of the tuition fee.
    • While calculating the expenses, the cost of a scholarship or other financial assistance must be factored in.

    Other Relevant Conditions

    Some other points that might help you in having a better understanding of the loan scheme:

    • If one of your brothers or sister from the family is a beneficiary under the scheme, then it will not have any bearing on a fresh loan.
    • There is no bar on the minimum age for taking the loan. However, if the parents execute the loan documents for minor students, the Student has to obtain a letter of ramification upon attaining majority.
    • If you can prove your credentials, the banks might even consider Top-up loans, which will help you study further.
    • Banks allow parents or legal guardians to become joint borrowers. If you are married, then your spouse or parents-in-law can also be included within the meaning of joint borrower.

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