What is Margin Money in Education Loans?

Many students dreaming of higher education either in India or abroad, take the help of an education loan to afford their education abroad. Thus, when you, as a student, are considering an education loan to cover your expenses, an important term called “margin money” should be known. This term will help you evaluate the right lenders from your education loan list.

What is Margin in Loan Agreement?

Margin money refers to the percentage of the total loan amount that you have to pay from your own pocket. Many times, we have seen people asking, “What is margin money in a loan?”. So, you can define “margin” in an education loan as a part of the total educational expense that you or your family must contribute. These terms play an important role while you are calculating the loan amount. Let’s understand the concept better using an example. 

What is Margin in Loan Example: 

Imagine Ajay is planning for higher education at a university in the United States, where the overall expenses for two years amount to INR 45 Lakh. Ajay approaches GyanDhan for his education loan requirements (smart choice, right?) and gets a loan sanctioned for INR 30 Lakh.

In this scenario, Ajay needs to arrange the remaining INR 15 Lakh himself. This INR 15 Lakh is the margin money. So, while the bank covers a significant portion of the education expenses (INR 30 Lakh), Ajay has to contribute INR 15 Lakh from his own funds.

Here’s a simple breakdown:

• 
  Total education expenses: INR 45 Lakh
• 
  Loan sanctioned by the bank: INR 30 Lakh
• 
  Margin money (Ajay’s contribution): INR 15 Lakh

Relation Between Margin Money and the Overall Expenses

Margin money refers to the portion of the total education expenses that the student (or their family) pays from their own pocket. However, overall expenses include tuition fees, living costs, travel, books, insurance, and other necessary expenses.

Margin money is directly linked to the total cost of education, which gets changed based on the loan amount. A higher loan amount means a higher margin money. For example, if a bank requires a 15% margin, and the overall expense is INR 40 lakhs, the student must contribute INR 6 lakhs, and the bank will fund the remaining INR 34 lakhs.

What is Margin in Loan Agreement by Different Lenders?

When it comes to education loan margin money, various lenders such as public banks, private banks, and Non-Banking Financial Companies (NBFCs) have different requirements and specifications. Therefore, you will get different answers to the question, “What is margin in loan agreement?”. Thus, understanding the need for margin money involves looking at the practices of each type of lender. 

Public Banks:

Public banks like SBI, UBI, and BOB typically provide education loans with collateral, meaning the borrower must pledge an asset against the loan amount. To ensure that the borrower is financially backed up and shares some responsibility, these banks do not cover 100% of the education expenses. Instead, they require the borrower to contribute a certain percentage of the total cost. This borrower’s contribution is what we refer to as margin money.

For example, if a public bank sanctions an education loan, it might cover 85% of the total expenses, leaving the remaining 15% to be covered by the borrower as margin money.

However, private banks and NBFCs such as ICICI Bank, Axis Bank, IDFC First Bank, HDFC Credila, Avanse, Auxilo, and InCred. They offer 100% of the loan amount and don’t have the margin money concept. However, they do offer a 100% loan at a slightly higher interest rate. 

Margin Money of Public Banks:

Private Banks & NBFCs:

Private banks, such as ICICI Bank, Axis Bank, and IDFC First Bank, offer unsecured education loans. These banks often have pre-approved lists of universities and colleges. One of the significant advantages of taking an education loan from a private bank is that it covers 100% of the education expenses. This means there is no requirement for margin money from the borrower.

NBFCs like HDFC Credila, Avanse, Auxilo, and InCred also provide unsecured education loans. Unlike private banks, NBFCs do not have pre-approved lists of colleges or universities. However, they share the same benefit of covering 100% of the education expenses, eliminating the need for margin money.

While both private banks and NBFCs do not require margin money and cover 100% of the education expenses, they generally charge a slightly higher interest rate compared to public banks. This higher interest rate reflects the unsecured nature of the loans and the increased flexibility they offer.

Understanding 0% Loan Margin

Private banks and NBFCs extend loans to students planning to study abroad with a 0% margin money. These loans are primarily unsecured education loans, and the approval depends on various factors.

However, if you want to avoid the higher interest rate of the private banks and NBFCs, then you can use a collateral of higher value to decrease the margin money to around 5-10%. Therefore, before confirming to the loan agreement, ask the lender about the details related to it. 

How is Loan Margin Calculated for Education Loans?

Margin money isn't fixed; it is variable, which depends on the terms of the lender. Usually, lenders cover anywhere from 85% to 100% of your total education expenses. The remaining percentage becomes your margin money.

For example, for students planning to study in the US, lenders often cover the entire I-20 amount as the total cost of education. This amount generally includes inflated living expenses that the university provides to meet visa requirements.

In some cases, while calculating EMI, lenders increase the I-20 amount to ensure that a student can manage the financial burden. This may give the impression that the margin money is low since the bank appears to be funding a large portion.

However, in reality, your actual contribution might end up being higher. Why? Because the I-20 amount is usually high, which also increases the margin money, hence, you find yourself covering a significant portion out of pocket due to the gap between estimated 

Let’s break it down with an example for clarity:

Scenario 1:

• 
  Overall Education Expenses: ₹45 lakh
• 
  Maximum Bank Funding: 85% of overall expenses
• 
  Maximum Loan Amount: ₹38.25 lakh (85% of ₹45 lakh)
• 
  Margin Money: 15% of total expenses
• 
  Margin Money Amount: Ajay will need to contribute ₹6.75 lakh (₹45 lakh − ₹38.25 lakh) lakh as margin money, while the bank will cover ₹38.25 lakh as the loan.

Scenario 2:

• 
  Overall Education Expenses: INR 45 Lakh
• 
  Loan Sanctioned: INR 30 Lakh
• 
  Margin money: INR 45 Lakh - INR 30 Lakh = INR 15 Lakh
• 
  Margin money percentage: (INR 15 Lakh / INR 45 Lakh) * 100 = 33.3%

Impact of Margin Money on Total Loan Repayment

Margin money significantly influences the total repayment and loan tenure by determining the loan amount sanctioned. Let us understand how it impacts the loan repayments:

Features of Margin Money in Education Loan

Let us understand some of the main features of margin money in education loans:

Student contribution:

Margin money in education loans is the amount you have to pay for your education expenses of studying abroad. It represents a part of the total education loan that you need to fund from your pocket.

Stepwise division:

The education loan amount is divided into different steps. The margin money is paid according to the requirements of the bank and the loan amount sanctioned. This division ensures that the student has a structured payment plan.

Variable percentage:

The percentage given by the bank for margin money is quite variable. It can decrease or increase based on the loan amount you request and your capacity to pay the margin money. Banks assess each loan application individually to determine the appropriate margin percentage. Please note that your placement chances and expected salary after your education also play an important role in deciding the margin money amount.

Zero margin money:

Private banks provide education loans to students with 0% margin money. This means the bank covers 100% of the educational expenses, making it easier for students who may not have funds available upfront.

Margin Money for Domestic vs. International Education Loans

Margin money requirements vary depending on whether the loan is for studying in India or abroad. Let us understand from the table below:

Government Schemes and Subsidies to Cover Margin Money

The Indian government offers several schemes to help students manage the financial burden of education loans, including margin money. These schemes and subsidies aim to make higher education more accessible, especially for students from economically weaker sections.

Vidya Lakshmi Portal:

• 
  The Vidya Lakshmi Portal is a one-stop platform for students to apply for education loans and scholarships.
• 
  It connects students with multiple banks and government schemes, helping them find loans with minimal or no margin money requirements.
• 
  The portal simplifies the process, making it easier to explore options like subsidies or low-interest loans.

Interest Subsidy Schemes:

• 
  The Central Sector Interest Subsidy Scheme (CSIS) is designed for students from families with an annual income of up to INR 4.5 Lakh.
• 
  Under this scheme, the government pays the loan interest during the moratorium period (course duration + 1 year).
• 
  This reduces the financial burden significantly, even if margin money is required.

State-Level Subsidies:

• 
  Many states offer additional education loan subsidies or scholarships for students pursuing higher education within India or abroad.
• 
  These subsidies can help reduce the amount students need to arrange as margin money.

To know about these government subsidies in detail, read the Government Education Loan Scheme.

Myths and Misconceptions About Margin Money

There are many misconceptions and myths about margin money. Let us first understand why margin money exists and then we will clear up some popular myths and misconceptions about margin money.

Why Margin Money Exists?

Margin money is a clear indicator that you are serious about your higher education and financially prepared. Banks ask for margin money as they share the financial responsibility with the borrower. Let us clear some of the myths about margin money:

Myth 1: Margin Money is the Bank’s Fee

Truth: Margin money is not a fee charged by the bank. It is your contribution to the total cost of the education loan. Banks use it to ensure you have a financial responsibility for your loan.

Myth 2: Margin Money Must Be Paid All At Once

Truth: You don’t have to pay margin money upfront or in one go. Most banks allow you to deposit it in installments, usually semester-wise or as per your loan disbursement.

Myth 3: Private Banks and NBFCs Always Require Margin Money

Truth: Many private banks and NBFCs offer loans with 0% margin money. They cover 100% of education costs but may charge higher interest rates.

Myth 4: A Higher Margin Money Means a Better Loan

Truth: A higher margin reduces your loan amount, but it does not always mean a better deal. It depends on your financial capacity and long-term repayment goals.

Myth 5: Margin Money is Fixed for All Banks

Truth: Margin money percentages vary across banks and depend on factors like the loan amount, type of lender (public or private), your choice of university or course, and country.

When it comes to education loans abroad, margin money is a concept that you must be very thorough with. It directly affects the loan amount and of course, the interest which you have to pay after the moratorium period. Public banks like SBI generally ask you to deposit some margin money but private banks and NBFCs (Non-Banking Financial Companies) do not ask for any margin money, although their rate of interest is considerably higher than the public banks.

GyanDhan Services

Well, while deciding on the perfect lender and ensuring that everything is on track. You can consider expert guidance. GyanDhan understands these complexities and is dedicated to you by simplifying the education loan process, so that you can realize your dream of abroad education. As India’s first education financing marketplace, we compare different education loans and help students secure the best education loan option. Whether you need assistance with securing a loan, understanding margin money, or planning your financial journey.

Also, you can choose any lender as per your requirements and financial conditions, but please understand that the concept of margin money and other related terms and conditions must be crystal clear to you, to plan your short and long-term finances accordingly.

Frequently Asked Questions