The rising costs of education, both in India and abroad, have made it difficult for students and their families to afford quality academic programs. As tuition fees and other associated costs continue to increase, education loans have emerged as an essential financial solution. Once approved, education loans can be used to pay your expenses for higher studies in India and abroad. The funds are disbursed directly to the university. Let’s explore more details on how education loans work, including their benefits, eligibility requirements, and the process of applying for them.
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How Does an Education Loan Work?
When students apply for an education loan, they are not required to start repaying the amount immediately. The repayment typically begins several months to a year after completing the course. Sometimes, the repayment tenure can be extended to 5 to 7 years, depending on the loan agreement.
Interest rates for education loans vary across banks. The loan amount is disbursed directly to the educational institution at the beginning of each semester. Additionally, education loans often cover tuition fees and other related expenses such as library fees, hostel charges, books, and laboratory fees. This ensures students do not have to pay these costs out of pocket.
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Loan Application Process
Before applying for an education loan, students must meet the eligibility requirements set by the bank or financial institution. While specific criteria may vary between banks, the general eligibility includes:
- The student must be an Indian citizen.
- The student should have secured admission to a recognized educational institution, either in India or abroad.
- Typically, the student should be between 18 to 35 years old, though this can vary based on the bank and the type of course.
- Most banks require a co-applicant (usually a parent or guardian) for loans above INR 7.5 lakhs.
When applying for an education loan, students need to provide the following documents:
- 10th and 12th Mark Sheets (for academic history verification)
- Admission Letter from the college or university
- Fee Structure of the course
- KYC Documents (Proof of Identity and Address)
- Income Proof of the applicant and co-applicant (in some cases)
- Collateral Documents (if applicable)
Loan Amount and Coverage
The loan amount varies depending on factors such as the course, the institution, and the location of study (India or abroad).
For domestic education loans, you can apply for financial assistance that ranges up to INR 50 lakhs. For studying abroad, loans can be availed up to INR 1 Crore for education in foreign institutions.
They help you cover major expenses beyond just tuition fees. These include living expenses, books and study materials, lab fees, travel expenses, laptops and other equipment.
Some banks like ICICI Bank offer education loans that cover all these expenses and provide a flexible repayment plan, ensuring that students don’t have to pay out of pocket during their studies. You can avail up to INR 3 crores of secured education loans.
Disbursement of the Loan
Once the loan is approved, the next step is disbursing the funds to the educational institution. The education loan disbursement process typically follows these steps:
Direct Payment to the Institution – The approved loan amount is directly paid to the educational institution at the start of the academic semester. This payment covers the tuition fees and any other institutional charges (like library fees, exam fees, etc.).
Other Expenses- In addition to tuition fees, education loans often cover other related expenses, such as:
- Hostel Fees: The bank may release funds to cover accommodation costs.
- Books, Supplies, and Travel: For students studying abroad, some banks release the loan amount for travel and other living expenses, such as accommodation and food.
This ensures that students don’t need to pay for these additional expenses out of pocket during their studies, providing comprehensive financial support.
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Repayment Process
One of the key features of education loans is the moratorium period, which is a grace period during which the student is not required to make any loan repayments. This period generally includes:
- The student does not need to repay the loan while they are still studying.
- After the completion of the course, students usually get a 6-month to 1-year grace period before they have to begin repaying the loan.
Repayment Tenure- Once the moratorium period ends, the student will begin repaying the loan. The repayment tenure is typically 5 to 15 years, depending on the loan amount and the bank’s terms. The EMIs (Equated Monthly Installments) are calculated based on the loan amount, interest rate, and tenure.
Tax Benefits on Education Loans in India
Education loans not only provide financial support for students but also offer significant tax rebates on education loans under Section 80E of the Income Tax Act, of 1961. These tax advantages can help reduce the financial burden on borrowers during the repayment phase of the loan. Let’s explore the key tax benefits associated with education loans in India.
Interest Deduction Under Section 80E
The main tax benefit of an education loan comes in the form of a deduction on the interest paid on the loan under Section 80E of the Income Tax Act. You can claim a tax deduction for the entire interest amount paid on the education loan during a given financial year. The principal repayment does not qualify for this deduction, only the interest portion of the EMI.
Unlike some other tax deductions, there is no upper limit on the amount of interest that can be claimed under Section 80E. This means that the higher your loan amount and the longer your repayment tenure, the more interest you can claim as a tax deduction.
Eligibility for Tax Benefits
The tax deduction on education loans is available to individual taxpayers who meet the following criteria-
- The loan must be taken for higher education—either for undergraduate or postgraduate courses—within India or abroad.
- The tax benefit is available only on the interest paid during the repayment period, not during the moratorium period (if applicable).
- The person claiming the tax benefit must be the borrower of the loan. If the loan is taken by the student, the parent or guardian (who is the co-applicant) can claim the deduction.
Claiming the Deduction
To claim the tax benefit, you need to get an interest certificate for an education loan from your lender (bank or financial institution) showing the total interest paid during the financial year. This certificate will be required for filing your income tax return.
- While filing your ITR, you need to include the interest amount paid on the education loan under Section 80E. This amount will be deducted from your total taxable income, thus reducing your overall tax liability.
- As mentioned, the principal portion of the repayment is not eligible for a deduction under Section 80E, so you don’t need to submit any documents related to the principal repayment.
Also Read: Know how exchange rate volatility affects student loans for international students. Check out the ways to deal with and manage finances wisely.
Example of Tax Benefit Calculation
Let’s consider an example to understand how the tax benefit can be calculated:
- Loan Amount: INR 10 lakhs for education loan
- Loan Repayment Tenure: 10 years
- Interest Rate: 10% per annum
- Interest Paid in Year 1: INR 1 lakh
If you paid INR 1 lakh as interest in the first year, you can claim the entire INR 1 lakh as a deduction under Section 80E. Assuming your taxable income is INR 6 lakhs, the tax benefit reduces your taxable income to INR 5 lakhs, thus reducing your tax liability.
If the loan continues for several years, and you continue paying interest, you can claim the deduction for each of the following 7 years until the interest is fully paid or the maximum 8 years of deduction is reached.
This was all about how education loan works. By understanding the loan application process, eligibility criteria, collateral requirements, and repayment options, students and their families can make an informed decision about which loan to apply for.
With banks offering flexible repayment terms, tax benefits, and coverage for a variety of academic expenses, education loans are designed to ease the financial burden of higher education. However, it’s essential to compare different loan offers, interest rates, and repayment terms to find the best option for your situation.
To learn more about education loans, the best bank accounts for students, forex, banking experience for global students, or international money transfers, reach out to our experts at 1800572126 to help ease your experience with studying abroad.
FAQs
An education loan is a financial product provided by banks or financial institutions to help students pay for their tuition, living expenses, and other education-related costs.
An education loan helps students finance their studies by covering tuition, living expenses, and other costs. Repayment starts after the course, with flexible tenures and tax benefits on interest paid.
You can apply for an education loan by visiting the bank’s branch, applying online through the bank’s website, or using government-backed portals like Vidya Lakshmi.
Collateral is required for loans above INR 7.5 lakh. For loans up to INR 4 lakh, no collateral is necessary, and loans between INR 4 lakh and INR 7.5 lakh may require a guarantor.
To be eligible, you must be an Indian citizen, have secured admission to a recognized educational institution, and meet the age and income criteria set by the bank.
Education loans cover tuition fees, hostel charges, books, study materials, lab fees, travel expenses, and sometimes even laptops or other essential study equipment.
Repayment generally starts after the completion of the course, with a grace period of 6 months to 1 year. The tenure can range from 5 to 12 years.
Yes, most banks offer education loans for studying abroad, with loan amounts up to INR 1 crore, covering tuition, travel, and living expenses.
Interest rates for education loans typically range between 8% and 14% per annum, depending on the bank, loan amount, and type of course.
Yes, under Section 80E of the Income Tax Act, you can claim a tax deduction on the interest paid on your education loan, with no upper limit on the amount.
Yes, most banks require a co-applicant, usually a parent or guardian, especially for loans above INR 7.5 lakh. This co-applicant shares responsibility for the loan repayment.
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