Interest Rates, Processing Charges and Margins of Education Loans

The interest rate is one of the most important deciding factors when students approach a bank for an education loan. The interest rate also determines the overall cost of your student loan.

• Interest rates vary significantly from bank to bank, and will also depend on the amount of the education loan.
• Most PSU banks have an option to allow you to defer the payment of interest and principal on the education loan till the completion of the course so that you can start repaying both the interest and principal from your earnings. However, you always have an option of paying the interest portion of the loan immediately from the month following the disbursal of the loan, and keep paying it during the tenure of the course. The interest is normally payable on a quarterly reducing basis.
• Some banks charge interest on a daily or monthly reducing balance.
• The interest rates on student loans can be fixed or variable. Under a fixed interest rate option, the rate of interest for the entire tenure of the loan will remain the same. Under the variable option, the rate is tied to the Prime Lending Rate (PLR) set by the bank, and keeps changing half-yearly or yearly.
• Usually, nationalised banks offer variable interest rates for student loans, while private and foreign banks offer fixed interest rates. Some banks, like SBI, also give you a choice between fixed and floating interest rates.

Processing fees

Processing fees vary from bank to bank. For example, PSU banks do not charge any processing fee, while some private banks charge 2.25 per cent as processing fee.

Margin

• The margin is the amount you need to pay from your own funds, while the rest is paid by the bank.
• Many banks insist on a margin for education loans, which means that they will provide between 75 per cent and 90 per cent of the total cost of the course; you will have to pay the balance.
• The scholarship amount, processing fee (if any) and insurance premium on the life insurance policy (paid by the bank) can be included in the total education loan amount for the purpose of calculating the margin.
• The margin requirements on education loans are not very rigid. The industry norm is generally 5 per cent for studying in India and 15 per cent for studies abroad, for amounts exceeding Rs 4 lakh. These, however, are indicative figures, and will vary from bank to bank.
• The margin money is calculated from time to time on the outstanding balance of the loan. You will be required to bring in this margin money on a year-to-year basis, as and when the disbursements are made on a pro-rata basis.