With rising cost of higher education, loans are becoming a key source of funding for those who want to get into top-notch institutes in India and abroad. Higher education is a Rs 80,000 crore market. And education loans for them is a Rs 13,000 crore space that’s growing at a fast clip. While the majority of courses opted by aspirants are the usual MBA and medicine degrees, students are increasingly showing propensity to try out new vistas.
Education loan in India, unlike abroad, is still a very modern concept and is opted for by students who have a proven academic track record. These students are very confident of paying back the loan once they are employed after completing their course in India or abroad.
Indian students are the second largest group of international students in the worldwide higher education market today. Combined with this, the rising costs of higher education and the Indian rupee’s slump in global markets have resulted in expanding the demand for education loans for especially foreign studies.
All the public and private sector banks are providing education loans. A few education loan specialists have also emerged — Avanse promoted by Dewan Housing Finance (DHFL) and Credila promoted by HDFC. Among the banks, State Bank of India is a major player in funding education loans along with other large PSU banks. Neeraj Saxena, CEO, Avanse education loans said, “Every year spending on education is rising at 10 per cent to 15 per cent, higher education spending in India is around Rs 80,000 crore, at present, of which 15 per cent to 16 per cent is funded through loans.”
Education loan is becoming crucial for funding studies abroad as well as for highly sought after courses in India. As per latest data, 3.5 lakh students go abroad for higher studies every year. Of this, 2.5 lakh go to the US alone. “The total spend on pursuing masters degree in the US for an exceptionally bright student is around Rs 25 lakh ($37,593 at current rupee-dollar rate of 66.5), and the cost for MBA course in India is around Rs 16 lakh to Rs 17 lakh. “The education finance business in India has grown at the rate of 30 per cent CAGR over the past five years from Rs 15,200 crore in 2006-07 to Rs 50,300 crore in 2011-12,” Saxena said.
With India’s youth showing high degree of maturity in terms of what they would like to pursue as a career and how they would like to finance their higher studies towards that goal, students themselves are involved in loan application and processing these days, thanks to information available on line and growing role of education consultants in guiding students to a right course and university, Saxena added.
Specialist education loan providers like Avanse are also prospecting students who would need loans from them in future by forging a relationship with around 400 educational institutions and 600 education consultants within the country as well as abroad.
“The number of students pursuing higher education in India and overseas has been growing year on year despite uncertainties in the economy and the rupee’s depreciation against the dollar, pushing costs up by 20 per cent to 30 per cent,” said an official from Credila.
Students are no more interested only in traditional courses for higher education, but are foraying into new areas. “Credila has noticed a growing preference towards unconventional courses like sports management, acoustics & music technology, sports therapy and sometimes courses as specific as cardio-respiratory physiotherapy in place of the popular engineering or traditional MBA programmes,” Credila official said.
With growing education loan demand, specialised education loan companies are seeing high growth in the range of 30 per cent to 50 per cent year after year.
As per provided data, Credila has disbursed a total of over Rs 2,300 crore of education loan at the close of May, funding thousands of students studying over 900 unique courses in more than 2,100 institutes across 35 countries.
Relatively new in education loan finance, Avanse has financed close to 3,000 students and had a loan book of Rs 375 crore as on March 31. Loans covering the full cost of the undergraduate education are available through many banks and NBFCS — sometimes the amount being disbursed is as high as Rs 1 crore or more.
The loan covers the entire cost of education for 3 or 4 years, including lodging – boarding and travel expenses. This allows students to choose a loan that suits their study needs completely. During loan processing, the student is required to bring a parent as a co-borrower and a collateral security is also required to guarantee the loan.
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Most banks provide unsecured lending up to Rs 7.5 lakh as no collateral is required for loans up to that amount. Banks like HDFC Bank provide wider collateral options for securing a loan of a higher amount than Rs 7.5 lakh like residential property, bank’s fixed deposit, LIC policy, national saving certificates (NSC) or a kisan vikas patra (KVP) issued by India Post.
Some financial institutions may waive off the collateral for certain courses or for meritorious candidates where job is guaranteed. Also, the value of the collateral can be less than the loan amount requested. Normally, lenders require collateral covering 100 per cent or more of the education loan amount.
Processing of education loan for courses starting in the July-September period every year starts in December of the previous year, allowing a gestation period of around seven months.
There are several benefits of an education loan. First, for exceptionally bright students, the repayment of the loan which happens after the completion of the course opted for is not difficult, as they get a job and payments are allowed over a period of 10 to 15 years. During the period of study, students and parent as their co-borrower are asked to pay simple interest or partial interest.
There are some tax advantages also provided by the Union government on interest paid on the education loan. Under Section 80 E of the Income-Tax Act, a person gets income-tax exemption on the amount paid against the interest of the education loan — either for self or for his/her spouse or children — for eight years from the year (s) he starts to repay the loan or for the duration the loan is in effect, whichever is more.
The above tax exemption is on loan taken for the purpose of pursuing higher studies of individual, spouse, children of individual. Hence, parents are also eligible to claim deduction of interest paid by them on loan taken for their children’s education.
With effect from assessment year 2010-11, the income-tax department has added additional fields of studies (including vocational studies) pursued after passing the senior secondary examination or its equivalent from any school, board or university recognised by the central or state governments. These are now covered under deduction in respect of interest paid on loan taken for higher education.
The Union government also provides interest subsidy from the ministry of human resource for students from economically weaker sections with annual gross parental/family income up to Rs 4.50 lakh per annum from the academic year 2009-10. The scheme is applicable only for studies in recognised technical/professional courses in India in educational institutions established by Acts of Parliament, other institutions recognised by the concerned statutory bodies, Indian Institutes of Management (IIMs) and other institutions set up by the central/state government. The limit under this loan scheme is Rs10 lakh.
The subsidy is provided for the period of moratorium i.e., 12 months after completion of the course or six months after getting the job, whichever is earlier.
Education loans allow a student to focus on pursuing the course of his or her choice and securing a great education. For example, a student pursuing a master’s course in the US with the help of an education loan finds it’s easier to repay, as he or she gets a job in the US or in a multinational company easily. Their salaries in dollars make it easier for them to pay back the loan in a short span of time.
In top US campuses like Princeton University, University of California (Berkeley) or Yale, the tuition fee is in the range of $37000 to $60,000, at present, according to education experts tracking course fees. While education loan in India is in a nascent stage, both lenders and borrowers need to exercise caution to avoid large NPAs.