How Your Education Loan Rate of Interest Can Change?

    Updated on: 09 Mar 2023

    Your Education Loan Rate of Interest Can Change?

    Yes! You have made it to your acceptance mail and you are probably in the seventh heaven. All that huge amount of ordeal is finally worth it. A fluffy think cloud pops up on your brain where you’re flying on a plane, landing in your dreamland, befriending a multicultural group of people and ending up with a 5 or 6 digit salary in the US. But wait – there are things that are yet to be lined up before you can begin your journey, and these things include your not-so-cheap tuition fee that might leave you in a bundle of nerves. Unless you have paternal ties with Lil Wayne or Bill Gates, you can’t help but apply for an educational loan.

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    Almost 8 out of 10 applicants who opt for an educational loan are unaware of the complexity around the rate of interest, and how it may change post sanction. Not to worry as it ain’t astro-physics that would take a millennium to get through. Here’s all you need to know about your education loan’s rate of interest:

    Your Rate of Interest is Liable to Change and Here’s How.

    • Educational loans are floating as the interest you’re supposed to pay is calculated by adding a variable Index and a fixed Spread. i.e.
      Final ROI = Index + Spread.
    • Usually, the Spread value varies from 1-2% according to the bank/ lender. Variable Index is the minimum rate of interest that a customer is charged by a bank and it depends upon various factors that are specific to a bank/ lender. It varies on existing economic conditions and as it fluctuates, it affects your rate of interest.
    • Thanks to the RBI, we have a newly devised formula to compute MCLR (Marginal cost of funds-based lending rate) which is the variable component in the Index. Now here’s an example of what happens: your floating rate of an educational loan at one year MCLR is 10% with a spread value of 1%. So the total ROI will be 11% (10% + 1%). This will be valid until you hit the Reset Period. The Reset Period varies is different for different banks – SBI’s is 1 year, whereas Axis Bank’s is 6 months. Now, let’s say the MCLR gets revised to 9% by the next Reset Period. Then, your ROI after the next Reset Period would be 10% (9% + 1%). Since banks are mandated to use this MCLR formula, they don’t have discretion in the matter at hand and any benefits of the policy rate cut are directly passed on to you.

    In the case of non-bank financial companies (NBFCs, Avanse, Credila, etc), the Index is not controlled by RBI. They are free to increase or decrease their Index as per their profitability needs! This is a risk that you, as a borrower, should be aware of.

    Which Bank Should You Choose For Your Abroad Education Loan? 

    Nationalized banks should be the ideal choice of every student who is looking for an education loan for abroad studies. The rate of interest offered by these lenders is one of the lowest in the market with many student-friendly terms and conditions. The rate of interest offered by SBI under its Global Ed-Vantage scheme is 8.55% for women and 9.05% for men. Similarly, Bank of Baroda offers 8.0% for women and 8.5% for men. 

    Apart from the low-interest rate, these banks offer secured education loans, which have benefits such as a longer moratorium period. Another key benefit of choosing SBI is that its rate of interest is fixed for the duration of the loan. This helps students plan their finances and predict their future payments. 

    Which Bank To Choose For An Unsecured Education Loan For Abroad Studies? 

    In the case of no collateral, the next best option is to apply for an unsecured education loan from Axis Bank or ICICI. Along with a longer loan tenure and quick processing time, Axis Bank has a refundable processing fee for a loan amount up to INR 20 lakhs. For a loan amount beyond INR 20 lakhs, the bank charges a very affordable fee of INR 750 per lakh along with GST. That is, for a loan amount of INR 40 lakhs, a student will have to shell out 750*(40-20) + GST = 15,000 + GST.
    Students won’t have to pay a penny more as GyanDhan’s loan application services are absolutely free of cost. 

    We, at GyanDhan, work in alliance with the Indian banks, who strictly adhere to the policies of RBI. Therefore, using our services will ensure that there aren’t any such unpleasant surprises as far as your interest rate is concerned.

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    Also, if you are planning to take an education loan via SBI, then we have launched a new service of door pickup of documents (at zero cost) which will reduce your time and effort substantially. 

    First published date: 20 Mar 2017


About author

Ankit Mehra
Ankit is the co-founder and CEO of GyanDhan. An IITK / IESE alum who previously worked at Capital One / Credit Suisse, his aim is to equalize and expand access to higher education. His interests include playing football (soccer), and basketball, trading/investing the limited money that he still has, and discussions on economics / politics.

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