Education and health are two sectors that have seen an increase in expenses post the Covid-19 pandemic. While startups are coming up almost every day to cater to the changing needs of students, especially, the costs are also going up given the increased levels of learning and orientation toward higher studies. This increasing cost of education can prove to be a burden on most Indians. According to a report published by GrayQuest (a fintech company based in India), the average Indian household spends as much as 13% of its annual income to cover its children’s education costs!
Given this scenario, a personal loan for students or an education loan is the best resort. And thankfully, it is now much easier to apply for student loans, given the relaxed guidelines by RBI and the increase in the number of NBFCs.
What is a Personal Loan for Students?
By definition, a personal loan is a financial agreement that is arrived at between the borrower and the lender. Typically, the lender proposes a fixed monthly amount over an agreed-upon period to be paid back by the borrower. It is “personal” because only the borrower has the liability to pay it back, and no one else.
Pros and Cons of A Personal Loan for Students
By nature, personal loans don’t have a stipulated spending ambit. But many lenders prevent them from being used to pay students’ tuition fees. Instead, people apply for a student loan to cover related expenses like house rent or groceries (if students are living on their own) or purchasing books.
The top benefits of a personal loan for students include the following:
- You can get instant liquidity to take care of immediate expenses.
- You can pay off the loan in easy monthly instalments.
- You can even build a good credit history.
Despite its advantages, a student loan application has its demerits:
- It has higher interest rates compared to other loans.
- You are potentially adding more debt burden.
- Your credit score might be affected in the long run.
How to Apply for Student Loans?
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Recently, it has prioritized a student loan application in order to help with education expenses. Its Model Education Loan Scheme, 2001, is the gold standard for disbursing personal loans for students. It allows the lender – banks or NBFCs – to check the borrower’s creditworthiness. This is important because it helps to ensure that those who borrow money for schooling can repay their debt promptly.
In most cases, you as a student might be taking a loan for the first time, in which case you may or may not have a credit score. Under these circumstances, the financial institutions or the lender will check the CIBIL score of your parents, who then become the co-signer for the student loan application.
Important RBI Guidelines for Applying for a Student Loan
The RBI has carefully drafted guidelines to help with the student loan application process. You should consider these before applying:
- Merit: The term “merit” is often used subjectively to determine whether or not you are eligible for a personal loan for students. Technically, if you have cleared an entrance exam to a professional course or higher studies, you will likely be eligible.
- Institution Credibility: The credibility of the institution you are getting into for which you are applying for a personal loan will also determine your chances of getting the loan. The chances are higher if it is a prestigious college or academic institution.
- Collateral: A student loan application comes in two forms – secured and unsecured. Depending on the approved loan amount, your loan will be unsecured, where you do not have to cite any collateral; or secured when you have to put up collateral. Most lending institutions would demand collateral if the loan amount exceeds INR 4 lakhs. If it is below this amount, collateral will not be required.
- Moratorium Period: The time period you get to repay the loan and by which time you start repaying the loan is what constitutes the moratorium period. You should check that the personal loan for students you have secured has a moratorium period which only begins after course completion. Typically, one year is the minimum for this. If you opt to start your own company after the course, you might also be eligible for a moratorium during its incubation period.
- Amount: Personal loans for students come with a loan limit of INR 10 lakhs if you are going to study in India. If you are going to a foreign university, you can apply for a student loan of up to INR 20 lakhs.
- Tax Exemption: Students can claim tax exemption on the interest paid on student loans. As per the laws in Section 80E of the Income Tax Act, you can claim this as a subsidy while filing your tax returns. There are still other schemes like the Central Sector Interest Subsidy for meritorious students from economically weak backgrounds. Under the latter, you can claim a 100% subsidy during the moratorium period.
Securing a personal loan for students is thus quite simple and helpful. Remember that lending institutions like Piramal Finance have been set up to help with the progress of education. If you have adhered to the student loan application process to the T, then rest assured that you will be well on your way to fulfilling your life’s dreams.