Pursuing higher education is a significant milestone, but the financial burden often deters many aspiring students. The idea of obtaining an education loan at zero interest rate is appealing, but is it a reality in India? Let’s delve into the details.
Understanding Education Loans in India
Education loans are financial products designed to assist students in covering the costs associated with their education. These loans can be availed from various banks and Non-Banking Financial Companies (NBFCs) and typically cover:
- Tuition fees
- Accommodation costs
- Books and study materials
- Travel expenses (for studying abroad)
- Other miscellaneous academic expenses
While these loans provide much-needed financial support, they come with an interest component, making the total repayment amount higher than the borrowed sum.
The Myth of Education Loan at Zero Interest Rate
Contrary to popular belief, no mainstream bank or NBFC in India offers education loans at a 0% interest rate. Even government-backed schemes, which provide interest subsidies, do not eliminate the interest entirely. Instead, they offer partial relief, reducing the effective interest rate to a more manageable level.
Government Schemes Offering Interest Subsidies
While zero-interest loans are not available, several government initiatives aim to ease the financial burden on students:
1. Central Sector Interest Subsidy Scheme (CSIS)
This scheme provides full interest subsidy during the moratorium period on loans availed under the Model Education Loan Scheme of the Indian Banks’ Association (IBA). The subsidy is available for students from economically weaker sections pursuing undergraduate and postgraduate courses in India. myScheme
2. Interest Free Education Loan Scheme (IFEL) in Goa
The Government of Goa offers an interest-free education loan scheme to assist students in pursuing higher and technical education in approved degree and diploma courses at undergraduate and postgraduate levels, both in India and abroad. Eligible candidates are exempted from payment of interest charges, provided they adhere strictly to the repayment schedule.
3. Bihar Student Credit Card Scheme
The Bihar government has declared that all education loans provided under the Student Credit Card (SCC) scheme will now be interest-free for applicants who have passed Class 12. This initiative aims to reduce the financial burden on students pursuing higher education in the state.
How to Reduce the Interest Burden on Education Loans
While completely interest-free loans are rare, there are several strategies to minimize the interest burden:
1. Opt for Government Schemes with Interest Subsidies
Participating in government schemes like CSIS can significantly reduce the interest burden during the moratorium period. Ensure you meet the eligibility criteria and apply through the respective banks offering these schemes.
2. Choose Banks Offering Lower Interest Rates
Different banks offer varying interest rates on education loans. For instance, State Bank of India (SBI) offers interest rates ranging from 8.20% to 11.15%, while HDFC Bank offers rates starting from 9.50% onwards. Moneyview Comparing rates and choosing a bank that offers competitive interest rates can help reduce the overall cost of the loan.
3. Repay During the Moratorium Period
Some banks allow borrowers to pay the interest during the moratorium period (the time between loan disbursement and course completion). Paying the interest during this period can prevent it from being capitalized, thus reducing the total interest payable over the loan tenure.
4. Maintain a Good Credit Score
A high credit score can make you eligible for loans at lower interest rates. Banks perceive individuals with good credit scores as low-risk borrowers, which can translate to better loan terms.
5. Consider Collateralized Loans
Secured loans, where you pledge an asset as collateral, often come with lower interest rates compared to unsecured loans. If you have assets to pledge, this option can be financially beneficial.
Example: Calculating Interest on an Education Loan
Let’s consider an example to understand how interest affects the total repayment amount:
- Loan Amount: ₹10,00,000
- Interest Rate: 10% per annum
- Loan Tenure: 10 years
- EMI: ₹13,207 (approx.)
Total Repayment Over 10 Years:
EMI × 12 months × 10 years = ₹13,207 × 12 × 10 = ₹15,84,840
Total Interest Paid:
Total Repayment – Loan Amount = ₹15,84,840 – ₹10,00,000 = ₹5,84,840
As seen, the interest component adds a significant amount to the total repayment. Strategies like repaying during the moratorium period or opting for government schemes can help reduce this burden.
Conclusion
While the concept of a zero-interest education loan is appealing, it remains largely a myth in India. However, by leveraging government schemes, comparing bank offers, maintaining a good credit score, and considering secured loans, students can minimize the interest burden and make higher education more affordable. It’s essential to stay informed about available schemes and plan your finances accordingly to ensure a smooth educational journey.