This article on ‘Laws Governing Education Loans In India‘ was written by Ashok Kumar Choudhary, an intern at Legal Upanishad.
Education loans are typically provided to students pursuing higher education, such as undergraduate, postgraduate, or professional courses in India and abroad. These loans aim to bridge the financial gap between the cost of education and the resources available to the student and their family. This article attempts to analyse the concept of education loans along with the rules and guidelines governing it in India.
WHAT IS AN EDUCATION LOAN?
An education loan is a type of loan specifically designed to help students and their parents finance the costs associated with higher education. It is a financial arrangement where a lending institution, such as a bank or financial institution, provides funds to cover various expenses related to education, including tuition fees, books, supplies, accommodation, travel, and other educational expenses.
- Loan Amount: The loan amount depends on the educational program, institute, and the lender’s policies. Generally, banks may offer education loans ranging from a few thousand rupees to several lakhs or even crores, depending on the course and institution.
- Interest Rate: Education loans can have either fixed or floating interest rates. The interest rates may vary among lenders and can be influenced by factors such as the loan amount, repayment period, creditworthiness of the borrower, and prevailing market conditions.
- Repayment: Repayment of education loans typically begins after the completion of the course or a certain grace period. The repayment period can range from a few years to several years, depending on the loan amount and the terms agreed upon with the lender. Repayment can be done in the form of equated monthly instalments (EMIs).
- Collateral and Guarantor: Education loans may require collateral or a guarantor as security, depending on the loan amount. Some loans may require tangible assets like property, while others may require third-party guarantees.
- Moratorium Period: Most education loans offer a moratorium period, also known as the repayment holiday, during which borrowers are not required to make any repayments. This period typically covers the duration of the course and a few months thereafter. Interest may accrue during this period, which is added to the loan amount.
- Subsidies and Government Schemes: The Indian government, along with various state governments, may offer subsidies, interest rate concessions, or other schemes to support education loans and make them more affordable for students.
WHO CAN APPLY FOR AN EDUCATION LOAN?
Education loans in India are typically available to Indian residents who meet certain eligibility criteria. The following individuals can generally apply for an education loan:
- Students: Students pursuing higher education, such as undergraduate, postgraduate, or professional courses, in India or abroad are eligible to apply for education loans. This includes students studying in recognized institutions or universities.
- Parents or Legal Guardians: Parents or legal guardians can also apply for education loans for their children pursuing higher education. They are considered co-applicants and are responsible for repayment along with the student.
- Indian Nationals: Education loans are generally available to Indian nationals. However, some lenders may also offer loans to Non-Resident Indians (NRIs) or Persons of Indian Origin (PIOs) under specific conditions.
- Eligibility Criteria: Lending institutions set specific eligibility criteria that applicants need to meet. These criteria may include minimum age requirements, academic performance, admission to recognized institutions, and other factors. The criteria can vary among different lenders.
Education loans in India are typically provided to students who are pursuing higher education, such as undergraduate, postgraduate, or professional courses. The loans are intended to support the educational expenses of these students, including tuition fees, books, supplies, accommodation, travel, and other related costs. The loans can be availed by Indian residents who meet the eligibility criteria set by the lending institutions. This includes students studying in recognized educational institutions or universities in India or abroad.
In some cases, education loans may also be provided to parents or legal guardians on behalf of their children who are pursuing higher education. These parents or legal guardians are considered co-applicants and share the responsibility of loan repayment along with the student.
RULES AND LAWS GOVERNING EDUCATION LOANS IN INDIA
Education loans in India are governed by various laws, regulations, and guidelines. While there is no specific law dedicated solely to education loans, the following rules and regulations play a role in governing education loans in India:
- INDIAN BANKS’ ASSOCIATION (IBA) Model Education Loan Scheme: The IBA has formulated a model education loan scheme that provides standard terms and conditions for lending institutions. Most banks and financial institutions in India follow these guidelines, although they are not legally binding.
- RESERVE BANK OF INDIA (RBI) REGULATIONS: As the central banking institution in the country, the Reserve Bank of India plays a crucial role in regulating financial activities, including education loans. The RBI issues guidelines and regulations to banks regarding the disbursement, repayment, and interest rates on education loans.
- CREDIT INFORMATION COMPANIES (REGULATION) ACT, 2005: The Credit Information Companies (Regulation) Act governs credit information companies in India. Lending institutions utilize credit information reports from credit bureaus to assess the creditworthiness of borrowers applying for education loans.
- INCOME TAX ACT: The Income Tax Act of India provides certain tax benefits to borrowers repaying education loans. Under Section 80E of the Income Tax Act, individuals can claim a deduction on the interest paid towards the repayment of education loans for themselves, their spouse, or their children.
In addition to these laws and regulations, some state governments in India may have their own policies and schemes to support education loans. These policies can include subsidy programs, interest rate caps, or other incentives for students availing of education loans.
TYPES OF EDUCATION LOANS
Different types of education loans are available to students and their parents to finance higher education expenses. Here are some common types of education loans:
- UNDERGRADUATE EDUCATION LOANS: These loans are specifically designed for students pursuing undergraduate courses. They cover tuition fees, books, supplies, accommodation, and other related expenses.
- POSTGRADUATE EDUCATION LOANS: These loans are meant for students pursuing postgraduate courses such as master’s degrees, doctoral programs, or professional courses. They provide financial assistance for tuition fees, research expenses, and other educational costs.
- STUDY ABROAD LOANS: Study abroad loans are tailored for students who plan to pursue higher education in foreign countries. These loans cover expenses like tuition fees, living costs, travel expenses, and visa fees associated with studying abroad.
- CAREER-SPECIFIC EDUCATION LOANS: Some banks offer specialized education loans for specific career-oriented courses such as management programs, engineering, medicine, law, aviation, or vocational training. These loans cater to the particular financial requirements of these fields.
- SKILL DEVELOPMENT LOANS: Skill development loans are designed to support individuals seeking short-term skill enhancement or vocational training programs. These loans help individuals acquire new skills and enhance their employability prospects.
- LOAN FOR MINORITY STUDENTS: Certain government schemes and banks provide education loans exclusively for students belonging to minority communities. These loans aim to promote educational opportunities and bridge the financial gap for students from marginalized backgrounds.
ELIGIBILITY DOCUMENT REQUIRED FOR EDUCATION LOANS IN INDIA
- Identity Proof: Valid proof of identity, such as an Aadhaar card, PAN card, passport, voter ID card, or driver’s license.
- Address Proof: Documents to establish the borrower’s residential address, such as an Aadhaar card, utility bills (electricity, water, gas), bank statements, or rental agreement.
- Proof of Admission: Documents that confirm admission to a recognized educational institution, such as an admission letter, offer letter, or fee receipt.
- Academic Documents: Academic records and certificates to verify the educational qualifications of the student, including mark sheets, degree certificates, or school/college leaving certificates.
- Income Proof: Income-related documents to assess the repayment capacity of the borrower or co-applicant/parent. These may include salary slips, income tax returns, bank statements, or a letter from the employer.
- Bank Statements: Bank statements for a specific period (usually the last six months) to evaluate the financial stability and transaction history of the applicant.
- Collateral Documents (if applicable): If the loan amount exceeds a certain threshold or if the collateral is required, documents related to the collateral may be needed. These can include property documents, land documents, title deeds, or other asset-related papers.
- Guarantor Documents (if applicable): If a guarantor is involved in the loan application, their identity proof, address proof, income proof, and photographs may be required.
- Photographs: Recent passport-sized photographs of the borrower, co-applicant, and guarantor (if applicable).
Education loans in India are governed by a combination of laws, regulations, and guidelines. While there is no specific law dedicated solely to education loans, various legal frameworks provide guidance and oversight to ensure fair and transparent lending practices. The Indian Banks’ Association (IBA) Model Education Loan Scheme serves as a reference for lending institutions, while the Reserve Bank of India (RBI) plays a significant role in regulating financial activities related to education loans.
The Credit Information Companies (Regulation) Act, of 2005, governs the use of credit information reports in assessing borrowers’ creditworthiness. Additionally, the Income Tax Act offers tax benefits to borrowers repaying education loans. State governments may also introduce their own schemes and policies to support education loans. As the educational landscape evolves, borrowers must stay informed about the latest laws and guidelines and seek guidance from lending institutions for accurate and up-to-date information regarding education loan regulations in India.
- Preeti Motiani, What is education loan? Here’s a guide, Economic Times, 15 October 2018, available at: https://economictimes.indiatimes.com/wealth/borrow/heres-all-you-need-to-know-about-an-education-loan/articleshow/56624785.cms
- THE EDUCATION LOAN BILL, 2016, available at: 126.96.36.199/billstexts/lsbilltexts/asintroduced/4259LS.pdf
- A Detailed Guide on RBI Rules for Education Loan in 2019. Repayment and Recovery!, Credenc, 18 April 2019, available at: https://www.credenc.com/blog/rbi-guidelines-for-education-loan