Myth vs Facts About Education Loan - What You Need to Know?

Education loans play a vital role in helping students achieve their career goals by providing the necessary financial support during their studies. In India, the total amount of education loans disbursed has been steadily increasing each year, reaching INR 17,000 Cr in 2022-23, which is an increase of INR 1,000 Cr from INR 16,000 Cr in 2021-22.

As the availability and scope of education loans continue to expand, it is essential for students planning to finance their education through loans to stay informed. One of the key challenges is distinguishing between the myths and facts surrounding education loans . To assist you in navigating this process, we have compiled a list of the top myths about education loans, along with the corresponding facts, to guide you effectively.

Facts About Education Loan

1. Myth: Self-funding is better than taking an education loan

Fact - Many people believe that self-funding is a better option than taking an education loan. However, relying solely on personal savings can be stressful, as it may involve exhausting your savings, selling land or vehicles, mortgaging gold, or borrowing from friends and relatives. In contrast, an education loan allows you to preserve your savings for family or medical emergencies.

Here are some reasons why an education loan can be financially more advantageous than self-funding:

• Interest Benefits: By taking an education loan, you can invest your savings elsewhere and earn interest, instead of spending all your money at once to finance your studies.
• Tax Benefits : Under the new TCS rules, self-funding is subject to a 5% tax on the amount, while education loans have a reduced tax rate of 0.5%. Additionally, you can claim a tax deduction on the interest paid on an education loan under Section 80E of the Income Tax Act.

2. Myth: You always need to pledge collateral for an education loan

Fact - Contrary to popular belief, not all education loans require collateral. Students can obtain loans with or without collateral from various lenders. Loans without collateral are provided based on the co-borrower's earnings and the student's profile. These loans can amount to INR 40-50 Lakhs (up to INR 75 Lakhs for STEM degrees in the US) and cover 100% of the expenses with Simple or Partial Simple Interest payment during the moratorium period.

3. Myth: You must have a credit history to get an education loan

Fact - It's a common misconception that having no credit history or CIBIL score makes you ineligible for an education loan. In reality, many lenders adopt a student-friendly approach, considering factors such as academic merits, future earning potential, entrance exam results, and the co-borrowers income when providing education loans to students without a credit history.

4. Myth: Education loans only cover tuition fees

Fact - Education loans cover a wide range of expenses beyond just tuition fees. They encompass both academic and living costs, including tuition and other fees, study materials, equipment, travel expenses, rent, food, and more. You'll need to provide proof for all funding categories. For more details, check the expenses covered by an education loan.

5. Myth: No need to worry about repayment while studying

Fact - Many students believe they don't need to worry about repayment while studying , as lenders typically don't require repayment during the moratorium period (course duration plus 6-12 months). However, interest still accrues during this period and is added to the principal loan amount. It's advisable to start repaying the education loan while studying, even if there's no immediate pressure from the lender.

6. Myth: Education loans only fund higher studies

Fact - Education loans are available for a variety of academic and professional goals, including higher education, vocational training, and upskilling courses for students, working professionals, and eligible individuals. Explore the offerings from different lenders to find an education loan that meets your specific needs.

Watch this video where Jainesh Sinha explains the top reasons for education loan rejection.

7. Myth: A co-applicant is always required for education loans

Fact - While a co-applicant is usually required for education loans from most lenders in India, there are exceptions. A co-applicant provides financial assurance since the student is typically not earning while applying for the loan. The co-borrower must be a blood relative, like a parent or sibling. However, international lenders like Prodigy Finance and MPOWER Financing offer education loans without requiring collateral or a co-borrower. Additionally, some loans for working professionals, such as ICICI Bank's experience-based product, allow applicants with at least three years of work experience to apply for an education loan without a financial co-applicant.

8. Myth: The education loan process is lengthy

Fact - The education loan process can be quick if you submit all the required documents on time. Non-Banking Financial Companies (NBFCs) and international lenders usually process loan applications in less than a week, while private sector banks take about 14 days, and public sector banks may take up to 30 days. Lenders often prioritize your application if your university fee deadline is approaching.

9. Myth: Repayment conditions for education loans are rigid

Fact - Education loan repayment terms are flexible and accommodating for students. Typically, you have 10 to 15 years to repay the loan, with options to shorten or extend the term based on your needs. Additionally, you can benefit from tax deductions on the interest paid for up to 8 years of your education loan repayment.

In summary, education loans are a valuable resource, but it's essential to verify the facts before making any assumptions. Don't miss out on the opportunity to apply for an education loan just because you feel you lack certain advantages others may have. Explore your options, apply for the right loan, and confidently pursue your academic goals. Check your education loan eligibility with GyanDhan , and receive guidance throughout the process.