Understanding Different Student Loan Types And Repayment Options

In today's cutthroat world, education has become a crucial ladder for achieving professional and personal growth. However, the rising cost of education in leading universities in India or abroad often poses a huge barrier for many students. Well, this is where Student or Education Loans come into play, offering a reliable solution to cover the gap between dreams and reality. We are here to help you learn about the different types of student loans and lenders available in the market, along with the repayment plans that can ease the financial burden once your education is over.

What is the Need for an Education Loan?

An education loan covers a broad spread of expenses, including tuition fees, books, accommodation, examination fees, and other educational expenses. An education loan is more than just a financial aid option for individuals who want to continue their studies without sacrificing quality because of budgetary limitations, given the rising costs of higher education. Additionally, it instils in students a sense of financial responsibility, preparing them for future financial management and planning.

What are the Different Types of Student Loans?

Education loans can be broadly classified into two categories based on the collateral requirement. The choice between these two categories depends on the borrower's financial situation, risk tolerance, and ability to provide collateral.

1. Education Loan with Collateral

The first type of student loan is an education loan with collateral. The primary advantage of education loans with collateral lies in their lower interest rates. The amount offered by such loans is higher, and the interest rates are generally lower compared to education loans without collateral due to the lower risk involved for the lender.
Since the lender has the collateral as a fallback in case of default, the risk associated with lending is significantly reduced. This security allows lenders to offer more favourable terms, including lower interest rates and potentially larger loan amounts.

2. Education Loan without Collateral

Another student loan type available is an education loan without collateral that does not require any security. They are based on the credit history of the borrower and the co-applicant. Due to the higher risk to lenders, these loans come with higher interest rates compared to secured loans. The absence of collateral makes these loans a more accessible option for a broader range of borrowers, especially those who do not own significant assets or prefer not to pledge them.
Additionally, education loans without collateral, also known as unsecured loans, have stricter eligibility criteria concerning the borrower's credit score and income levels, and the loan amounts offered may be smaller with shorter repayment periods compared to secured loans.

What are the Different Types of Lenders for Education Loans?

Along with the question of what type of student loan you have, one wonders what are the different types of lenders available in the market? Primarily, these lenders can be categorised into Public Banks, Private Banks, and Non-Banking Financial Companies (NBFCs). Here’s a closer look at each of these lender types:

1. Public Banks

Public Banks are government-owned institutions. They play a pivotal role in offering education loans with collateral with relatively lower interest rates and longer repayment periods, making them an attractive option for study abroad aspirants. Popular public banks include State Banks of India, Union Bank of India, Punjab National Bank etc.

2. Private Banks

Private Banks offer education loans without collateral with higher flexibility in terms of loan amounts and the inclusion of a broader array of courses, including part-time and vocational programs not typically covered by Public Banks. They also tend to have stringent credit and income criteria for loan approval, focusing on the creditworthiness of the borrower and the co-applicant. Leading private banks include ICICI Bank, Axis Bank, IDFC First Bank, etc.

3. Non-Banking Financial Companies (NBFCs)

Non-Banking Financial Companies, or NBFCs, are financial institutions that provide banking services without holding a bank license. NBFCs can be a viable option for students who may not qualify for loans from Public or Private Banks due to stringent eligibility criteria. They are known for their quick processing times and customer-centric approaches. However, NBFCs typically charge higher interest rates than banks and may offer shorter repayment terms. Popular NBFCs are HDFC Credila, InCred, Avanse, etc.

4. International Lenders

International lenders such as MPOWER Financing and Prodigy Finance offer educational loans without the need for collateral or a cosigner. Also, Interest rates tend to be higher because they are denominated in USD and then converted into INR. Even minor fluctuations in the interest rate can lead to substantial changes in the total interest payable, significantly affecting the students' financial situation. They bring several benefits to students looking to study abroad. International lenders eliminate the need for collateral or a cosigner, making education accessible to a broader range of students. The application and approval processes are typically streamlined and conducted online, offering convenience and faster access to funds.

Features of Education Loans Offered by Different Lenders

Now that you have a fair idea of student loan types and lenders let us go through the features of each of the lenders. The comparison will help you understand which type of lender will suit your requirements better.

What is the Repayment Plan for Education Loan?

Equated Monthly Installment (EMI) is the most traditional form of loan repayment. Under this plan, borrowers start paying a fixed monthly amount after the moratorium period, which includes both the principal and interest components of the loan.
* A moratorium period is a grace period typically granted until the borrower completes their education and sometimes extends a few months after graduation, allowing the borrower time to secure employment.

Different types of education loan lenders offer different repayment options. Public banks do not require education loan applicants to make any type of payment during the moratorium period. On the other hand, Private banks and NBFCs require students to pay either simple interest or partial simple interest during the moratorium period.

How to Choose the Right Lender for Your Education Loan?

Choosing the right lender for your type of student loan is a critical step in your journey toward higher education. The right student loan lender can not only provide you with the financial means to pursue your studies but also offer terms and conditions that are favourable to your financial situation both during and after your course of study. Here are some tips to help you select the best lender for your education loan:

Step 1 - Understand your needs
Step 2 - Select the type of loan of your choice.
Step 3 - Check your loan eligibility.
Step 4 - Compare interest rates
Step 5 - Select the best lender

Choosing the right lender for your student loan type requires careful consideration of your financial needs, the terms and conditions of the loan, and the lender's reputation. That's where you can seek help from GyanDhan as a trusted ally on your educational journey. They offer end-to-end support, from initial counselling to final loan disbursement, ensuring a seamless process. Their partnerships with leading banks and NBFCs mean you get access to the best deals and exclusive benefits tailored just for you.