Educational loan disbursement falling since FY20

Total amount of educational loans disbursed by scheduled commercial banks in India has been steadily falling since the peak in FY20. While in 2019-20, a total of ₹18,553.46 crore was disbursed, in 2020-21 as well as in 2021-22 it came down to ₹18,350.83 crore and ₹17,715.33 crore, respectively, according to RBI (Reserve Bank of India) data released recently.

"Students get education loans to pursue higher studies in UG (Under Graduate) and PG (Post Graduate)  courses, in India or abroad. The Indian Banks’ Association (IBA) model educational loan scheme for pursuing higher education in India and abroad was formulated in 2001," said a State Bank of India (SBI) branch manager based in Chennai.

Since then, the scheme has been modified from time to time, based on the experience gained and feedback received during its implementation over the years.

"As per the scheme guidelines of 2015, there were ceilings on the educational loan amount i.e. a maximum of up to ₹10 lakh for studies in India and a maximum of up to ₹20 lakh for studies abroad. As per the last revision undertaken in 2021, banks now have the freedom to provide need-based finance. Banks are broadly guided by the above scheme while sanctioning educational loans," said the bank official.

Meanwhile, students from just six states namely Maharashtra, Tamil Nadu, Kerala, Telangana, Gujarat and Karnataka account for 57% of the education loans disbursed by various scheduled commercial banks in the year 2021-22, as per the data released by the Reserve Bank of India recently. It is worth mentioning that these six states have been cornering more than half of the total education loans disbursed in the last few years.

Students from Maharashtra have taken ₹2,272.86 crore as education loans and this is the maximum among these six states. Maharashtra is followed by Kerala (₹2015.41crore) and Tamil Nadu (₹1,634.43 crore).

The Government of India sets an educational loan disbursement target for public sector banks (PSBs) every financial year. Banks have the freedom to provide need-based finance, as per the latest revision of IBA Model Educational Loan scheme undertaken in 2021, he said.

The department of higher education in the Ministry of Education is handling the Credit Guarantee Fund Scheme for Education Loans (CGFSEL). As per this scheme, the credit guarantee is provided for education loans covered under the Indian Banks’ Association (IBA) model education scheme up to ₹7.5 lakh without any collateral security and third-party guarantee.

Further, the government has also launched an online portal called Vidya Lakshmi Portal (VLP) to ensure hassle free education loans through a single window system. Students can apply, view, and track the education loan applications submitted to banks anytime, anywhere by accessing the portal. Further, the decision on a loan application is to be reported by the banks on VLP.

When it comes to financing higher education there is always a dilemma of either using parents’ savings or taking out an education loan. While using personal savings keeps you away from the worry of paying it back, it comes along with the burden of emptying out the retirement savings of the parents.

In such a situation, it is better to take an education loan as these are low-cost loans. Banks charge around 7-12% interest along with the unlimited tax benefit on interest deduction. Moreover, instead of using personal funds for educational expenses, the optimal way is to apply for low-cost loans from a lender and invest funds where they can get better returns.

M Narayanasamy* , a Computer Science Student, has got admission in a university in the United States. He needs ₹40 lakhs to take care of fees for two years of MS in the US university as well as his own expenses for stay, food and travel.

'I have applied for an education loan seeking ₹40 lakh in a private bank which has a separate wing for disbursing education loans. We were told that if we provide collateral for the loan the interest rate will be less compared to loan taken without any collateral," said Narayanasamy.

The University wanted students to show sources for paying fees either from family savings or a sanction letter from the bank which has agreed to provide the needed funds.”The Universities abroad want to attach letters from at most three bank accounts in which the father or mother have accounts to show that they have enough funds. Otherwise, we must get a sanction letter from the bank which provides the loan,” said Narayanasamy.

"Students are generally discouraged from using personal funds, contingency funds, or retirement funds of their parents.These funds can be used better if invested in schemes with higher returns. However, students often rely on personal funds to finance a part of their education costs to reduce their dependence on education loans," said Madras School of Economics director K R Shanmugam.

"For example, if I have ₹30 lakh, and based on my past investment experience, I can get a 12% return, it makes more sense to invest ₹30 lakh, and borrow ₹30 lakh from a lender at an effective interest rate of 6.3%. On the other hand, if not thought through properly, not taking an education loan can become an enduring burden," said Shanmugam.

At present, following several changes in the bank rates by the RBI, the interest rate for education loans with collateral is around 10.25% to 10.75%  and for loans taken without collateral the interest rates vary from 11.25% to 12.25%. "Once the bank is satisfied with the documents presented by us, we are asked to pay 1% of the total loan amount as processing fee and only after this, the bank issues the sanction letter," said Narayanasamy.

The loan is disbursed to students and interest is deducted from the parents’ income till the student completes his education. Later the loan is repaid by the student through EMIs.