Amitabh Saikia had thought that getting an education loan would be a cakewalk. He wanted a loan to pursue a masters in business administration (MBA), and education loans fall in the priority sector lending category. But the long procedure of submitting forms, receiving rejection notes, re-applying and getting guarantors proved to be gruelling.

“It was a harrowing experience,” says Saikia, who took the loan to study at the Institute of Business Studies and Research, Navi Mumbai.

Manan Gupta, an Indian Institute of Management, Lucknow, alumnus, however, needed only a few days to get a loan. “A couple of banks were invited to our campus and all that we had to do was apply,” he says.

The big players in the educational loan business are nationalised banks. “In the last few years, the education loan market has increased by 35 to 40 per cent,” says K.R. Vijendra, general manager, retail, Union Bank of India, Mumbai.

Education loans have also made studying abroad easier. You can pay back the loan once you land a job. Some banks have tie-ups with educational institutes and offer comprehensive loan packages to save students from procedural hassles.

And just as the banks scrutinise your application, it would be prudent to check out what is on offer at a few banks. That way you can see what suits you best before signing on the dotted line. If you want your borrowing experience to be closer to Gupta’s rather than Saikia’s, you’ll have to do some homework.

How much do you need?

Before you even start applying for a loan, figure out how much money you need to fund your studies. Once the entire expenditure is calculated, find out what percentage of the cost you want to take as a loan.

According to Mumbai-based financial planner Gaurav Mashruwala, you should apply for a loan only when it is “absolutely” essential. “Don’t forget that if you take an education loan, you will have to begin your career in debt,” he says.

Yet, many students seek loans, regardless of the financial burden. “I took an education loan because I didn’t want to burden my parents,” says Rajat Kumar, a student at the Gujarat National Law University. Kumar took a loan of Rs 1.3 lakh last year to pay for his tuition fees and accommodation.

What’s covered

Most education loans cover tuition fees, hostel fees, money for books and equipment necessary for the educational programme, laboratory fees and travel expenses, in case you are going abroad. The maximum amount a student studying in India can get as a loan is Rs 10 lakh, while those who opt to study overseas can avail themselves of Rs 20 lakh. Banks such as the State Bank of India also give up to Rs 50,000 for a two-wheeler.

The thumb rule that most people follow while applying for loans is the rate of interest. Usually the interest rates are on a par with or a little higher than those on home loans but less than those on personal loans.

“Don’t compare interest rates, check the EMI (equated monthly instalments),” advises Mashruwalla. “You should keep the EMI at a level where you can pay it off easily once you are employed,” he adds. Ideally, the EMI should not be more than 20 to 30 per cent of your take-home salary after employment.

Floating or fixed?

There are two kinds of interest rates: floating (this varies according to market conditions) and fixed (this remains the same throughout the tenure of the loan). The fixed interest rate is usually higher than the floating one. “Opting for a floating interest rate is better,” says Harsh Roongta, CEO, apnapaisa. com, an online portal that compares the cost of loans, insurance and investments. “Fixed interest rates make sense only if you are not paying a huge premium on your loan or if the loan is for a short duration,” he says.

Compare interest rates

Before you even apply for a loan, check online financial portals to get the lowdown on the interest rates banks levy. Approach the bank directly to avail yourself of a loan; avoid intermediaries. Find out what the processing fee and annual charges of different banks are to compare rates. The margin money or down payment is a percentage of the amount that the applicant needs to pay while availing the loan. For most banks it varies between 10 and 25 per cent. Finally, check if you need to pay a pre-payment penalty in case you want to pre-pay your loan.

Collateral concerns

For loan amounts of up to Rs 4 lakh, the applicant does not have to furnish any collateral.

“However, for loans above Rs 4 lakh and up to Rs 7.5 lakh, a co-applicant is required,” says Vijendra. The co-applicant has to provide proof of identity, residence proof, bank statements and income proof (salary slip and the latest Form 16). For loan above Rs 7.5 lakh, collateral will have to be furnished. Banks accept fixed deposits, insurance policies and real estate as collateral.

Paper work

“Be ready to furnish a long list of documents,” says Saikia. Apart from the completed loan application, you will have to provide mark sheets of the last qualifying examination, proof of admission, scholarship details — if any, schedule of expenses for the specified course and your bank account statement for the past six months. You will also need to furnish statements of the co-applicant’s assets and liabilities, as well as his or her proof of income.

Payment time

The waiver period before the repayment of loan is crucial. “Most banks don’t expect a student to start repaying the loan until he or she gets a job or till one year after the completion of the course,” says Roongta. This allows you to get financially comfortable before you start paying back the loan.

Some banks will also allow you a moratorium on the payment of interest, which means you can defer paying the interest till six months or one year after the course is completed, or until you find a job, whichever is earlier. If you opt for this, you have to pay a higher rate of interest that is compounded quarterly and added to the principal sum for repayment.

“The waiver time was the deciding factor in my case,” says Gupta. He took a loan of Rs 5 lakh for a period of seven years and is now paying Rs 10,000 a month after he got a job.

Course eligibility

Before applying for a loan, check whether the course that you are opting for is considered eligible by your prospective loan provider. “Mostly courses that have easy employment prospects are eligible for an education loan,” says Mashruwalla. Among the eligible courses are undergraduate and postgraduate programmes approved by the University Grants Commission (UGC), All India Council for Technical Education (AICTE) and other regulatory bodies.

“I had a tough time convincing the bank that my course is recognised. Eventually, two seniors from my college had to act as guarantors to prove the placement records of my institution,” says Saikia. In most cases, banks also have a ready list of courses that are eligible for an education loan.

So with a little research and a lot of paperwork, getting that loan shouldn’t be too difficult. Just keep a copy of this paper handy!