Understanding How Education Loan Works: Types, Benefits, and Process

Rising education costs can make higher studies feel out of reach, but an Education Loan bridges that gap. This loan covers tuition, living expenses, books, and travel for studies in India or abroad, helping students pursue their goals without draining family savings.

Repayment typically begins after graduation, easing financial pressure during college. Plus, borrowers enjoy tax benefits and flexible repayment options. To choose wisely, it’s essential to understand loan types, interest rates, required documents, and eligibility criteria.

Let’s break it all down so you can fund your future with confidence

What is an Education Loan and Why is It Important?

An Education Loan, also known as a student loan, is a financial aid that covers tuition fees, accommodation, travel, and other academic expenses. It allows students to pursue higher education without upfront financial strain. Repayment typically begins after graduation, often with flexible terms.

Education loans are crucial for accessing quality education, especially for costly programs like Engineering, Medicine, MBA, or International degrees. They enable students to focus on studies, secure admission to top institutions, and build a strong career foundation.

How Education Loan Works?

An education loan covers key academic expenses like tuition fees, living costs, exam fees, books, and travel (for overseas studies). Once approved, the bank disburses the amount directly to the institution—either in full or per semester.

Once approved, the bank disburses the amount directly to the institution either in full or per semester. Repayment begins after a moratorium period, typically 6–12 months post-course completion or once you secure a job.

Different Types of Education Loans

Education loans are broadly categorised based on:

1. Study Location: India or Foreign

• Domestic Education Loan: For those who wish to pursue education in India.
• Overseas Education Loan: This is for those who wish to pursue education outside the country. It includes the cost of travel, visa, insurance, and overseas living costs, along with the tuition fee.

2. Type of Lender: Government or Private

• Government (Federal) Education Loans: Offered by government banks at lower rates of interest and with ease of repayment.
• Private Education Loans: Offered by private banks or NBFCs. They can have quicker processing, but usually at a slightly higher rate of interest.

3. Secured vs. Unsecured Loans

• Secured Education Loan: This loan is secured with collateral in the form of property, fixed deposits, or insurance.
• Unsecured Education Loan: No collateral is required, but there may be a higher interest rate or a lower loan amount.

Every loan category has a specific interest rate, repayment rate, document rule, and maximum loan amount. The right one to apply for is based on your study program, travelling location, and financial history.

Benefits of Taking an Education Loan?

Education loans don't only cover college costs; they have far more benefits:

1. No Down Payment Necessary

You do not have to plan for a considerable amount of money before you actually start your education. The loan covers significant expenses.

2. Reimburses All Costs

In addition to tuition fees, education loans can also reimburse your study materials, hostel charges, equipment, and even transportation (for overseas courses).

3. Repayment Flexibility

You normally begin repaying after finishing the course. Some lenders even offer you a grace period to help you get a job.

4. Builds Credit History

Timely repayment enables you to establish a good credit history, which is handy when looking for other loans in the future.

5. Tax Benefits

You can avail yourself of interest deductions paid on your Education Loan under Section 80E of the Income Tax Act. There is no ceiling, and you're covered for a maximum of 8 years.

Educational Loan Interest Rates in India

Interest rates for education loans vary based on the bank, course, and nature of the loan (secured versus unsecured). Here's an overview of going interest rates:

• Rates of interest can be different, so always compare and check the latest available.
• Lower interest rates are usually granted for loans against security or for certain government-sponsored plans.
• Some interest subsidy is given by certain banks to girl students, further lowering the rate of interest.

Documents Required for Student Loan

Proper documentation ensures that you get approved for your student loan without any delay. Here's what you usually need:

• ID Proof
• Income Proof of You and Your Parents
• Address Proof
• Previous Education Documents
• Admission Documents

How to Apply for an Education Loan?

Applying for a student loan in India is very simple and straightforward. All you have to do is follow these steps:

Step 1: Select a Bank or Financial Institution

Compare and consider different banks and NBFCs. Compare interest rate, loan repayment tenure, moratorium, and processing charges.

Step 2: Check Eligibility Criteria

Most student loans have certain parameters in terms of academic background, type of course, ranking of college, and income level.

Step 3: Complete the Application Form

You can do it online on the bank's website or offline by going to the branch.

Step 4: Submission of Documents

Upload or submit all the documents mentioned with the completed form.

Step 5: Verification and Sanctioning

Your documents, course, and financial history are checked by the bank. If everything is okay, your  student loan will be sanctioned.

Step 6: Loan Disbursal

The amount is paid to the educational institution according to the fee structure. Some portion can be paid to the student for other expenses like books or travel.

How and When Do You Pay an Education Loan?

Here's what the loan repayment process looks like:

1. Moratorium Period

You don't have to repay equated monthly instalments (EMIs) as soon as you get the loan. Banks provide a moratorium period for education loans (typically course duration + 6–12 months) before EMI begins.

2. EMI Options

Once the moratorium is over, your EMI starts. EMI is calculated based on:

• Total loan amount
• Rate of interest
• Repayment tenure (can be a maximum of 15 years)

3. Prepayment

You can repay early if you get a job or any spare money. Prepayment reduces the educational loan interest rates and total loan burden. Banks do not charge for prepaying in most cases.

4. Significance of Periodic Payment

• Avoids penalty
• Keeps credit score healthy
• Creates trust for future loans

Banks can provide step-up EMIs or a graduated repayment facility if asked in advance.

How to Compare Education Loan Options?

An educational loan isn't just about securing the cheapest interest rate. It's more about availing a loan that suits your line of study, pocket, and future salary level. Here's what you should consider while comparing education loans:

1. Interest Rate

This is the most important thing to consider. Even a small variation in the rate of interest can make a large difference in your overall sum of repayment. Try to get loans with lower interest rates, particularly if you are eligible for concessions (such as being a female student or studying in a high-ranked institution).

2. Repayment Tenure and Flexibility

Longer tenures result in lower EMIs but higher cumulative interest. Step-up EMIs or penalty-free prepayments are provided in some banks. Opt for the one that best fits your financial arrangement after your studies.

3. Moratorium Period

This refers to the period before your repayment starts. A longer moratorium period provides you with relief after finishing your studies. Always know how your lender treats this period.

4. Processing Time and Fees

There are certain processing or service fees charged by banks. Quick processing helps when the dates of admission are near. Always read the terms and conditions carefully.

5. Collateral Requirement

See whether the loan is secured or unsecured. If you do not wish to pledge assets, go for a no-collateral loan, but note that higher interest rates could be charged.

6. Customer Service and Support

Good customer service is very important. Look for online reviews or check other students' experiences.

By comparing all of these things, you will be in a much better position to choose an education loan that provides you with the best balance of affordability, flexibility, and peace of mind.

How to Manage Student Loan Debt Wisely?

The only way to secure your finances after finishing your education is to manage your Education Loan wisely. Even though the loan is paying for your studies now, your future handling of it will influence your credit record, savings, and financial freedom.

1. Borrow Sensibly

Borrow only what you absolutely need. Don't let yourself be tempted into borrowing a little more "just in case." The higher you borrow, the longer and more agonising the repayment.

2. Pay During Moratorium (If Applicable)

Though you don't have to make any repayment during the moratorium period, do make a payment of the interest component every now and then. This small step can reduce your overall repayment by a huge amount.

3. Make a Repayment Plan

Once you're working or have finished your course period, create a repayment plan. Use online EMI calculators to decide on the monthly instalments. Set up auto-debit so that you won't miss payments.

4. Budget Your Salary

When you are working, create a budget for each month with your EMI added. Reduce unnecessary expenditures. Take your loan EMI as an unavoidable monthly expense, just like rent or electricity bills.

5. Pay Extra When You Can

If you are getting bonuses or supplementary paychecks, invest a portion of the funds in paying extra on the loan. This can lead to reduced terms for the loan and less interest paid throughout the duration of the loan.

6. Stay in Touch With the Lender

If you encounter financial hardship or reorganisation, speak with your lender beforehand. Certain banks offer short-term relief programs.

To Conclude

An Education Loan is a practical solution for students aiming to pursue higher studies without financial barriers. It covers essential academic costs and offers a grace period before repayment begins, allowing students to focus on their education first. By choosing the right loan, preparing documents, and understanding repayment terms, students can invest confidently in their future. Ultimately, an Education Loan is not just about funding; it’s about enabling ambition, unlocking opportunities, and building a strong foundation for career success.

Poonawalla Fincorp offers a hassle-free Education Loan of up to ₹1 Crore without collateral. Apply now and take a step towards a brighter future.

FAQs

Is it good to take an education loan for studying abroad?

Yes, education loans are one of the best ways to study abroad if you belong to a middle-class or lower-middle-class family and are struggling financially.

What is the repayment period for an education loan?

The repayment period will always depend on the lending bank. However, in general, the repayment period of education loans is 7-15 years. 

Do I need a guarantor or collateral for an education loan?

If your loan amount is high, then you’ll need a guarantor. However, if your amount is not that high, then you won’t need a guarantor or any type of collateral.

Can I get tax benefits on my education loan?

Yes, you can claim tax benefits under Section 80E and can reduce the tax liability on the interest that you pay for up to 8 years.

Can I apply for an education loan without a confirmed admission?

Yes, you can start the application early. Some lenders offer pre-approval based on entrance exam scores or provisional admission. However, the loan is disbursed only after final admission is confirmed.