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5 things to know before applying for a student loan

Getting into your dream university or going abroad for higher education is what many students aspire to. But education is expensive, a situation made worse by the high inflation of education. Also, with the economy affected by the Covid pandemic, many parents may find it difficult to finance their child’s education. A study loan can be the solution whether you want to take a management course or any other.

A student can apply for such a loan in a public sector or a private bank or even a non-bank financial company (NBFC). But before applying for the loan, keep a few things in mind to avoid financial complications in the future.

Improve your chances of getting the loan

Academic record, chosen institute/course, loan amount and other factors play a role in loan approval. “The chance of getting a loan easily is greater for reputable institutions that have better job prospects. The student’s academic record also has an important role,” says a senior officer in the loans department of Bank of Baroda (name omitted on request). “For high-end institutions such as IITs and IIMs, interest rates can often be low.

There is a high chance of getting a better job after the course is finished and the risks (of unemployment) are low, so the interest rates will be lower for these high-end institutions,” adds Adhil Shetty, CEO of BankBazaar, an online loan and insurance marketplace.

Keep your documents ready

The list of documents to submit varies from lender to lender, but it is important to have all the documentation in place before applying for a student loan. “Personal documents such as proof of residence and letter of admission from the institution should be there in the first instance,” says Raj Khosla, managing director of My Money Mantra, a lending platform. Parental income documents are also needed in most cases, as students typically don’t have proof of income at this age, Shetty adds.

“There will also be a credit history inquiry (of the borrowers). One must have a copy of their credit report. There must also be a co-applicant, usually the parents. Make sure your documents meet the lender’s requirements. If you take out a high value loan, a collateral can help your case,” says Shetty.

Most lenders do not require collateral for loan amounts up to Rs 4 lakh; for amounts ranging from Rs 4 lakh to Rs 7 lakh, no collateral is required, but lenders ask for a third party guarantor. For loans of a higher amount, a student must provide full security.

Usually, property papers, insurance papers and gold are used as collateral, but for some premium institutions lenders give a concession. Thus, they may ask for less or no collateral.

Consider processing time

Turnaround time varies by lender. “It could be as little as two weeks or as long as two months. If you are borrowing against collateral such as a fixed deposit, approval can also be instant,” Shetty adds. The processing time also depends on the amount of the loan and the need for collateral.

Most of the time is needed for the pre-sanction inspection and verification of the co-applicant, residence and educational institution. Therefore, keep a reserve of about two months before you need the loan amount to be disbursed.

Eligibility and Margin Criteria

Both public and private sector lenders offer a multitude of loan options. Nevertheless, it is important to compare the options. Study the eligibility criteria of each lender, then apply for the option that suits you best in terms of cost, interest rate, turnaround time, etc.

Often, for large loan amounts, lenders require a margin, in which case a student has to pay the required amount to the lender or the institute, before the lender disburses the loan amount to the respective institute, explains the head of the Bank of Baroda.

Repayment

The government can grant a loan repayment subsidy in certain cases, depending on the parents’ income. “There are various lower interest rate regimes. Especially for female students, many banks offer discounts on the interest rate,” explains the head of Bank of Baroda.

While many student loans are offered, non-repayment can be a cause for concern if employability is not high. “When a student applies for a loan, he must be absolutely sure that he will be able to repay his monthly installments after the course ends. Remember that the loan has to be repaid at the end with interest and it is not cheap. So, the sooner the student starts repaying the loan after completing their studies, the better,” says Khosla.

One can take out a student loan, but read all the terms and conditions before taking the plunge.