How to Save INR 2 Lakhs (or More) With the Right Education Loan?

What if we told you that the rate of interest on an education loan might change post-sanction, would you be surprised? 8 out of 10 loan applicants would say an unequivocal yes. 
Few, if any, are aware of the complex formula that defines the interest rate of a student loan. Most Indian bank and NBFC loans come with a floating interest rate. 

What’s a Floating Rate? We explain it here. In this article, we keep the spotlight on how a fixed interest rate, like the one provided by SBI, significantly impacts the total savings of an applicant. This post also explores other factors of an education loan that help save more.

What are the Education Loan Factors That Can Reduce Your Overall Cost?

For something as complicated as a study abroad student loan, several determinants can help you save up to INR 2 Lakhs (or even more). But, the boss of them all is the rate of interest. Why? Because it ranges from as low as 8.85% to as high as 16%, depending upon facets like:
The Lender, Which are of 4 Types:

• Public Sector Banks: SBI, BoB
• Private Banks: Axis, ICICI
• NBFCs: Avanse, Incred
• International Players: Mpower

The Education Loan Scheme, which is of 2 Types:

• Secured, i.e. Loan with Collateral
• Unsecured, i.e. Loan without Collateral

Repayment Period

How Does Interest Rate Sensitivity Determine Your Savings?

To understand how ROI determines your savings, let’s compare student loan interest rates. Keeping the loan amount (INR 40 Lakhs), and the repayment period (10 years) constant, we use GyanDhan’s EMI calculator to calculate the total interest for varying ROI.

The table unequivocally proves that even a minuscule jump of 0.25% in interest rate unfavourably impacts the applicant. A whole 1% difference indicates you end up paying INR 4 Lakhs more to repay the study loan. This is why GyanDhan always recommends the lowest-rate education loan options to applicants after precise evaluation of their profile. We also highly recommend fixed-rate loans (recently launched by State Bank of India). Since the ROI doesn’t fluctuate over the loan tenure, you dive into the loan with eyes wide open, knowing the exact, unaltering amount to be paid. To know your fixed-rate loan options, check your loan eligibility here. 

Check Your Education Loan Eligibility

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How Interest Subsidy Educational Loans Further Impact Savings?

Another step to save on student loan interest is to leverage one of the many education loans that provide subsidy on interest launched by the Government of India. For instance, the Dr Ambedkar Central Sector Scheme provides full interest waiver during the moratorium period to EBC and OBC citizens. To know more about the benefits, watch this video.

How Choosing a Domestic Lender Over International Lender Helps?

An easy way to economise an education loan is to pick a domestic lender. Even when a USD loan is offering a lower ROI, an INR loan turns out to be a prudent choice in the long-run. The primary logic for it is the steadily depreciating value of Indian currency when compared to US dollars. 

Education Loans in INR Vs. USD - What should you choose?

Example:
Let’s assume you had two education loan options in 2014 when USD 1 was around INR 60:

• INR 30,00,000 at 11%
• USD 50,000 at 9%

You pick the international lender because the interest rate seemed better. Fast-forward to 2017 when you have to repay the loan, i.e. the entire USD 50,000 ( 32L in 2017 as 1 USD rose from INR 61.80 to INR 64.50 in 3 years) plus interest. A loss of over INR 2L straight away. But, what if you had chosen the domestic loan? In that case, you’d just have to repay INR 30L (equivalent to $47,620 in 2017) because the conversion rate has made INR weaker since 2014!

Shorn of verbiage, a domestic lender saves you a considerable amount of money.

Know the Processing Fee

Most lenders levy a processing fee on an education loan. It can vary from 0% to 5%. Although the amount may not seem high, every drop in the ocean counts. So, opt for a loan that doesn’t charge you through the nose on processing fee.

Few banks that offer low processing fee options:

• State Bank of India:  Rs 11,800 
• Bank of Baroda:  Rs 11,800 (Refundable) 
• Axis Bank: INR 750 Per Lakh for loan amount more than INR 20 Lakhs

Let’s compare them with:

• NBFCs and international lenders 1% to 5% of the loan amount

Example: An unsecured education loan of INR 30L from Axis Bank will have a processing fee of INR 7500 only, whereas an NBFC that levies a processing charge of 2% of the loan amount will demand INR 60,000 which is a loss of INR 52,500 even before loan disbursal. 

Get Education Loan For Abroad Study

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Pick a Study Abroad Loan with Tax Benefits

As per Chapter VI-A of Section 80E, education loan borrowers can claim deductions, albeit only on interest and not on the principal loan amount. It means you don’t have to pay any tax on the interest payments.

• There is no upper limit to the interest amount.
• The deduction is separate from the INR 1,50,000 under section 80C.
• The tax benefit can also be claimed by parents or the spouse.
• To claim the tax, you’ll need a bank-issued certificate mentioning the interest paid that year.

When taking an education loan, your biggest concern should be a low-interest rate option (preferable, fixed interest rate). We’ve revealed how it minimises the financial impact. But, factors like tax benefits help reduce the burden further because, over the tenure of the loan, the tax claims transform into sizeable savings. 

An Example Clarifies How

Take, for instance, an INR 20 Lakhs student loan to be repaid over 5 years. The interest rate is 11.5%. Roughly, each year the interest paid will be around INR 2.3 Lakhs. If the parent, spouse or the applicant comes within the top shelf of the tax slab i.e. 30%, then they can save as much as INR 70,000 annually in taxes, which can sum up to INR 3.5L over the loan tenure!

Key Point

This tax subsidy on education loan applies only to a few financial institutions (all banks). Most NBFCs are not covered within Section 80E. It means taking a loan from a non-banking lender can turn heavier on your pocket. 

Opt for an Insurance Cover

An insurance cover safeguards the family of the borrower from the liabilities of the education loan. In case of a fatal eventuality, the co-applicant is not liable to repay the loan. The insurance pays off the entire amount.
Technically, an insurance cover is a win-win situation because it indemnifies the risk to the bank and the applicant’s family.

Moreover, the premium for the insurance, which varies as per lender, is paid from the loan itself. The applicant doesn’t need to pay it upfront. Students need to be aware of the unnecessary insurance that some lenders try to sell with education loans. If you have even a small doubt, you can always confirm it with GyanDhan’s education loan counsellors. 

Saving on an Abroad Student Loan: What Advice GyanDhan Gives?

Every student who hopes to study abroad has different needs. From the college they pick to the country they select; dozens of little things add together to define loan requirements. GyanDhan’s focus is to find the most suitable and cost-effective study loan with maximum savings for the student based on his/her specific requirements and to do so in the shortest period of time. Remember, an education loan that fits one applicant may not be such a great option for another.

That said, broadly, we use the following descending order when helping students find funding for overseas education:

1. Public Sector Banks

These are best for secured loans as they have the lowest processing fees and rate of interest. If you are Rinn Raksha policyholder offered by SBI, then a further reduction in interest is possible. Plus, you get tax benefits.

2. Private Banks

These are the nonpareil choice for unsecured loans as PSB’s have an INR 7.5 Lakhs limit on education loans without collateral. The interest rate is lesser than NBFCs, and the processing fee is low too. Moreover, their loans are eligible for tax benefits.

3. NBFCs

We recommend the lowest-interest NBFCs to those applicants who are not eligible for an education loan from banks or come with poor academic records or CIBIL history. These education loans have higher ROI and processing fee, plus they offer no tax aids. So, we filter out the lenders as per their interest rates and negotiate with them on the applicant’s behalf. Check your loan eligibility for NBFCs if you have been denied an education loan by any banks.

Read more about: Education Loans From NBFCs

4. International Lenders

These are the last resort and preferred for applicants who come to us with excellent academic records to study in the USA or Canada without collateral and co-applicant. They offer exorbitant ROI and steep processing fee with no tax claim benefits. But, they offer loans on the basis of an applicant’s calibre and not their financial history or capabilities.

The Takeaway

A fixed interest rate, a low processing fee, tax benefits, and all the other facets explained above influence how much you can save on an education loan. But, these are concrete, analytical factors. There are other, more abstract elements that can help you save even more. 

A simple example is planning your education loan repayment well in advance using our EMI calculator. When you are aware of how much money you have to shell out each month, you prepare for it by making sensible lifestyle choices. By that we mean, instead of splurging away your part-time work earning while studying, you save it to repay the loan. Every penny saved now is a buck paid in the future.

Still, a little lost? We, at GyanDhan, can help you compare different options of the best education loans for students who wish to go abroad for higher studies. Let our loan counsellors take away the uncertainty of the process by minutely evaluating your profile and helping you search for the most cost-effective loan option that guarantees maximum savings in the future.