Before applying for a collateral-free education loan, you must know that the student is the main borrower of the loan and parent, spouse or sibling can be the co-applicant.
To get a loan from a lender, you generally have to pledge security such as house property, fixed deposits, shares, bond, etc., to take the loan. This is done so that in case you default on the loan, lenders can recover it by selling the pledged security. The security pledged against a loan is termed as collateral.
However, you can get an education loan without pledging any security. The Credit Guarantee Fund for Education Loans (CGFEL) Scheme provides a guarantee for education loan dispersed by banks under the Model Education Loan Scheme of Indian Banks’ Association (IBA). Under this scheme, you can get a collateral-free loan amount for up to Rs 7.5 lakh without providing any third-party guarantee.
There is no margin requirement if you apply for a loan within this limit through a scheduled commercial bank under the CGFSEL scheme. It means that the bank can finance up to 100 per cent of the loan if the loan is up to the limit of Rs 7.5 lakh. Under the CGFEL scheme you can get a loan up to Rs 10 lakh for study in India and up to Rs 20 lakh for studying abroad. But, if you take a loan of more than Rs 7.5 lakh, the bank may ask for collateral for the loan amount. The bank may also ask you to deposit margin money and seek the third-party guarantee.
Gaurav Aggarwal, Director & Head of Secured Loans, Paisabazaar.com said that normally lenders require a third-party guarantee or tangible collateral as security, depending on the loan amount. He said, “You do not have to provide collateral and present a third-party guarantee for a loan up to Rs 7.5 lakh under the CGFSEL scheme.”
Do all banks provide collateral-free education loan benefit?
IBA has formulated the ‘Model Education Loan Scheme’ to financially support meritorious students for pursuing higher education in India and abroad.
The guidelines issued by IBA for the CGFSEL educational loan scheme is generally followed by banks. However, the banks may vary in providing loans under the scheme as per their own internal rules.
Aggarwal said that some banks do provide collateral-free loan option to students looking to pursue higher education from premier institutes. However, it’s the bank’s sole discretion to waive off a third-party guarantee or tangible collateral security requirement. He further explains, for instance, for a loan up to Rs 4 lakh, lenders only require parents/guardians as joint borrower(s). But, lenders can ask for a suitable third-party guarantee for loan amount in the range of Rs 4 lakh to Rs 7.5 lakh, besides having parents/guardian as a joint borrower.
However, “You will be required to provide tangible collateral security if the loan amount is more than Rs 7.5 lakh, along with the assignment of future income of the student for payment of instalments,” he added
Can you get a collateral-free loan above Rs 7.5 lakh?
However, if your education loan requirement is more than Rs 7.5 lakh or even more than Rs 10 lakh, you can reach out to other lenders to get a collateral-free loan. Adhil Shetty, CEO, BankBazaar.com said, “Non-banking financial companies (NBFCs) and private lenders can provide you collateral-free loans for a higher amount, but these collateral-free loans are sanctioned at a slightly higher interest rate as compared to education loan taken with collateral.”
The process to apply for an education loan
Before applying for a collateral-free education loan, you must know that the student is the main borrower of the education loan and parent, spouse or sibling can be the co-applicant.,
Banks generally ask for co-applicant details when you apply for a collateral-free loan. Not only this, but banks also ask for the income documents such as salary slips or income-tax returns (ITR) of the co-applicant before sanctioning the education loan.
As per the Reserve Bank of India (RBI) guidelines, there are no restrictions on the upper age limit, but some banks may have it as per their own internal rules and regulations.
To apply for the loan, you should be an Indian citizen, having secured an admission into a college/university recognised by a competent authority (NAAC/NBA accredited Institutions/programmes or Institutions of National Importance or Central Funded Technical Institutions (CFTIs)) in India or abroad.
The lender will ask for the admission letter of the college/university with the fee structure of the course for which you have applied for the education loan. Apart from this, lenders may also require documents such as Class X, XII and graduation (if applicable) mark sheets.
When your loan application is accepted by the lender, then the lender disburses the amount directly to the college as per the given fees structure.
Points to remember
- All students taking education loan under the CGFSEL educational loan scheme also get one-year moratorium for repayment after completion of studies. Basically, lenders can give a relaxation of about one-year time to start repaying the loan after you complete your education.
- Shetty said that the tax deduction benefit under Section 80E of Income Tax Act for interest paid on education loans is available only when you have taken the loan from a financial institution operating under the Banking Regulation Act, 1949 or an eligible trust/institution as per the prescribed rule. “So, when applying for a collateral-free loan of more than Rs 7.5 lakh from non-qualified institutions, you may miss out on the tax deduction benefit under Section 80E of the Income Tax Act,” he said.
- Generally, repayment period of education loan is 15 years. However, you should try to repay the loan amount at the earliest as tax-saving deduction benefit is available for up to 8 years only.
(This story originally appeared on The Economic Times)