Education Loan Interest Rate: A Comprehensive Guide | GyanDhan
Published date: 26 Feb 2021
Updated on: 26 Feb 2021
Education loans ease the mental strain of gathering the money to finance abroad studies. They are easy, accessible, and hassle-free. Well, easy and hassle-free only when the loan is taken through GyanDhan. Nonetheless, they are quite helpful when you need large amounts of money to study at your dream university and your dream destination.
The main component of an education loan after you have taken it and the part that is bound to trouble you the most is the - INTEREST RATE. This is the reason people hesitate to take an education loan in the first place. A lot of misconceptions surround it, which often discourage people. When you know something in detail, the fear of it disperses.
So, let’s get to know about this dreaded interest rate in detail, shall we?
What is an interest rate?
Interest rate is the amount of money charged on the principal amount by a lender for using its money/asset. If you borrow money from someone, you will have to pay some monthly amount over and above the principal amount. In simple terms, it is the cost of borrowing money from a bank or other financial institution.
When you borrow money to fund your abroad education, you are charged an interest rate at which you will repay the money. The total amount you repay monthly is called Equated Monthly Installments (EMI), which is a sum of principal amount and interest.
How is interest calculated on an education loan?
Here, you need to recall the basic math chapter that we all learned in class 5. There are two ways to calculate an interest rate - simple interest rate and compound interest rate.
Simple interest is calculated by multiplying the principal amount, rate, and time divided by 100. For example - you borrow INR 50,000 for 1 year at a 5% interest rate, then according to the formula, you owe INR 2500 as interest. When repaying the borrowed amount, you will have to make an extra payment of INR 2500 as a fee.
Compound interest is calculated by charging interest on interest. The formula for it is
Amount = Principal [1+(interest rate100)] ᵀ, where T stands for Time, and interest rate is divided by 100 when interest is compounded annually. Now, to use this formula to actually calculate your interest on an education loan is a tedious task, unless you are Einstein. So, to make it easy for you, we came up with an EMI calculator tool. Simply enter the details of your education loan, such as the amount, interest rate, time, etc., and know the total interest you have to pay on your loan amount. There are other factors involved in an education loan, and therefore, the amount will vary accordingly.
For example, you borrowed INR 10 lakhs at an interest rate of 10% for 5 years. The total interest on this amount is INR 4,97,916.
Total Interest to be paid
4,97,916
Total Payment (Principal + Interest)
14,97,916
Your EMI per month will be
24,965
In an education loan, the interest charged is a combination of both. During the study period, simple interest is charged, and after, compound interest is charged.
How many types of interest rates are there?
There are mainly two types of interest rates offered by the lenders - Floating interest rate and Fixed rate of interest.
A floating rate of interest is a rate of interest that can increase or decrease during the loan tenure. This increase or decrease is a result of the market conditions. Public sector banks offer less volatile interest rates, that is interest rates won’t increase too much. Whereas, private banks and private lenders offer interest rates that might increase more than 2% during the loan tenure. The interest rate offered by them has two elements - Base rate + Spread. So, when a base rate changes, the floating element also changes, leading to a change in the EMIs as well.
A fixed rate of interest is an interest rate that stays the same throughout the loan tenure. It will not change even if there is a change in the Repo rate of the Reserve Bank of India (RBI) or the lending rate of the lender. The EMIs remain the same as well.
There is only one lender in the market - State Bank of India, that offers a fixed interest rate for abroad education loans. You can read about it here.
Which interest rate is better - floating or fixed?
This depends from person to person. Some borrowers want to stick to the market rates and choose a floating rate of interest. A floating rate of interest, while carrying the risk of increasing interest and EMI, also carries the benefit of a lowered interest rate. A lowered interest rate due to market fluctuations will also lead to lowered EMIs.
A fixed interest rate will lead to no fluctuation in the EMIs or the interest rate. There is no surprise at all. But this also means that if the lending rate of the lenders decreases, you won’t benefit from it and have to repay the amount by the same interest rate.
For an education loan, it is better to go for a fixed rate on interest as the repayment is done by the student. At the start of your career, it is wise to play safe and go with no surprises.
What is the MCLR in education loans?
This is a word, we are sure, many of you have read at least once while researching education loans.
For example - SBI Global Ed-Vantage Education Loan -
3-year MCLR + Spread
Effective interest rate
7.30% + 2.00
9.30%
Ever wondered what MCLR is? It is the minimum interest rate below which a financial institution cannot lend. The full form of MCLR is the Marginal Cost of Funds Based Lending Rates. Back in 2016, the RBI saw that banks were offering different base rates to different borrowers. While prime borrowers got a lower base rate, some ordinary customers were cheated with a higher base rate. To curb this practice, the RBI introduced MCLR, which ensured that every customer got the same base rate. The banks are mandated to publish at least five MCLR on their website - overnight, 1-month, 3-month, 6-month, 1-year. This brought much-needed transparency to the financial institutions and ensured that the customer benefitted from the reduced interest rates.
Readers should know that the MCLR can and will change with a change in the Repo Rate of the RBI. If the Repo Rate is increased, the MCLR of the bank will increase, leading to an increased interest rate and an increase in the EMI or the loan tenure. As a customer, you can choose which aspect of your education loan should increase - the tenure (to keep the EMI unchanged) or the EMI (to keep the tenure unchanged). This is how the market works.
As we mentioned above, the fixed interest rate does not change with the market trends; it’s only the floating rate that changes. So, the MCLR is linked only with the floating rate of interest and not with the fixed interest rate.
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What are the base and the spread of abroad education loans?
The base rate is a rate below which a lender cannot lend money. The spread is the margin based on customer and product-specific factors.
Base rate and MCLR may seem similar at first glance. However, there is a difference. The base rate is based on the average cost of funds - calculated by considering the minimum profit margin; whereas, the MCLR is based on the marginal/current cost of funds - calculated by considering tenor premium.
Spread is added to both base rates as well as MCLR.
How the base rate and MCLR changed over the years?
You must have figured out by now that base rate and MCLR are what drives your education loan interest rates. Let’s glance at the base rate/MCLR of the past 10 years to see a change -
Year
Public Banks
Private Banks
2010
7.60 - 9.00
7.50 - 9.50
2011
10.00 - 10.75
10.00 - 11.25
2012
9.75 - 10.50
9.70 - 11.25
2013
9.95 - 10.25
10.00 - 11.50
2014
10.00 - 10.25
10.00 - 11.50
2015
9.30 - 9.95
9.30 - 11.40
2016
8.65 - 9.30
8.40 - 11.73
2017
7.65 - 8.10
7.65 - 10.04
2018
8.00 - 8.40
8.05 - 9.68
2019
7.65 - 8.10
7.60 - 10.25
2020*
6.55 - 7.10
6.70 - 9.30
Note - these rates change every quarter. To make it simple, we have taken the rates at the end of the Dec quarter.
*For the year 2020, the data for the December quarter was not available. The data mentioned is of the September quarter.
Source - Reserve Bank of India (RBI)
How is education loan EMI calculated?
Now, we know how interest is calculated in an education loan. But how is EMI calculated? This is a tricky one as there are too many variables. An interest rate is influenced only by market trends. But an EMI is affected by the loan amount, type of interest rate, loan tenure, and duration of the course. Any change in these elements will result in a high or low EMI.
The best way to calculate your Education Loan EMI is to use the GyanDhan EMI Calculator. Various customizations will allow you to find the right mix of these variables. It is important to select the right loan tenure so as to find the EMI amount that you can manage to pay.
Use the tool to find the perfect combination of interest, EMI, loan tenure, etc., and save the EMI schedule for future use.
When does interest in education loans start?
The interest on an education loan starts as soon as the amount is disbursed to the applicant’s account. During the study period, most lenders charge simple interest. After the study period + 6 months end, compound interest is charged.
Should you make interest payments, prepay the loan before the tenure ends? What are the benefits? Read this article to clear your doubts.
Can an education loan interest be reduced?
Yes, it can be. Excited to know how? Well, there are various subsidies offered by the government to reduce the financial burden on students. A few of them are - Padho Pardesh, Dr. Ambedkar Central Sector Scheme, and Central Sector Interest Subsidy Scheme.
Padho Pardesh - Interest subsidy on education loans schemes to pursue abroad education, provided to students belonging to minority communities.
Dr. Ambedkar Central Sector Scheme - It is an interest subsidy scheme for abroad educational loans provided to promote the foreign education of Other Backward Classes and Economically Weaker Classes.
Central Sector Interest Subsidy - It is an interest subsidy scheme for economically weaker sections. If the family income is not more than INR 4.5 lakhs, the student can avail of the interest subsidy.
Read about these schemes and eligibility criteria in detail here.
How to apply for an interest subsidy on abroad education loans?
The subsidy can be availed by contacting the concerned bank/lender. You will have to submit an application and certain documents such as an Original Income Certificate, Interest Subsidy Agreement, Student Letter issued by the Institute, Self Declaration, and some additional documents.
We have talked about various aspects of an interest rate. So, now, let’s discuss the interest rates offered by different lenders currently -
What is the rate of interest offered by Public banks?
We, at GyanDhan, always prefer public banks for abroad education loans. There are quite many benefits that a student can avail to further lower their financial strain.
Read about them here - Tax Benefits Under Chapter VI-A of Section 80E For Educational Loans
Apart from these benefits, public banks also offer lower interest rates, charge less processing fees, and offer better terms and conditions. Public banks also offer a moratorium period - a period during which the borrower has to make no repayments. Surely, simple interest is charged on the disbursed amount but is added to the principal amount and distributed equally among the EMIs. After the moratorium period ends, compound interest is charged.
The two main abroad education loan products are offered by the State Bank of India and Bank of Baroda -
Bank
Interest rate
SBI’s Global Ed-Vantage Loan
8.30% for women
8.80% for men
BOB’s Baroda Scholar
7.85% for women
8.35% for men
What is the interest rate offered by private banks?
There are several private banks in the market offering both types of abroad education loans - Secured education loans and unsecured education loans. We always advise students to take secured education loans from public sector banks only because of the benefits that they carry. Unfortunately, public banks do not offer unsecured education loans above INR 7.5 lakhs, which won’t be enough to fund education in a foreign country.
The simplest solution is to take an unsecured education loan from a private bank. Let’s look at two main private banks offering unsecured education loans -
Lender
Interest rate
Axis Bank
Starts at 11.25%
ICICI Bank
Starts at 11.50%
Are there other lenders offering Unsecured education loans?
We asked this question because we have an answer. So, yes, there are other lenders as well, known as Non-Banking Finance Companies (NBFCs). These private lenders raise their money from financial institutions and private investors. They act as a bank, meaning they can lend money and offer other financial services but do not hold a banking license.
A foreign education loan from NBFCs might be heavy on your pocket because the rate of interest offered is a little higher compared to other lenders. Additionally, students have to make simple interest payments during the study period, meaning they need a co-applicant to apply for these loans. The EMIs will start after the study period + 6 months are over. There are several benefits of taking an education loan from an NBFC as well. Read about them here.
Let’s take a glance at the interest rates offered by leading NBFCs -
NBFC
Interest rate
Auxilo
Starts at 12.70%
Avanse
Starts at 12%
HDFC Credila
Starts at 11%
InCred
Starts at 12%
Which bank has the lowest interest rate?
With the help of the above tables, you’d be able to conclude that public banks offer the lowest interest rates. As an applicant, you will have to pledge collateral to apply for a loan from government banks.
But, what if you don’t have collateral to pledge?
Then, private banks are your next best bet.
Actually, your best bet is to contact GyanDhan. Talk to our Education Loan Counselor to discuss all the available options. And then apply for the loan from a lender that suits your needs and requirements. Forgo all these hassles of comparing interest rates and terms and whatnot. Let us handle that so that you can focus on your admission application process. You’d know by now - we do not charge anything from the students. Our financial advice? Absolutely free of cost!
There’s just one final question that will surely interest you -
How have interest rates changed over the last few years?
Mentioned below are the base rates over the last few years -
2010-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
8.00
16.00
Bank of India
9.00
15.75
Indian Overseas Bank
9.25
14.25
State Bank of India
4.00
16.25
Private Banks
Axis Bank
6.00
14.50
ICICI Bank
6.00
18.00
2011-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
10.75
17.75
Bank of India
10.00
17.75
Indian Overseas Bank
11.00
15.50
State Bank of India
4.00
16.50
Private Banks
Axis Bank
7.75
15.75
ICICI Bank
5.00
19.00
2012-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
10.50
17.50
Bank of India
10.00
17.75
Indian Overseas Bank
11.50
15.75
State Bank of India
4.00
17.25
Private Banks
Axis Bank
7.75
15.75
ICICI Bank
5.00
19.00
2013-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
10.25
15.00
Bank of India
10.25
19.00
Indian Overseas Bank
11.25
15.50
State Bank of India
4.00
18.00
Private Banks
Axis Bank
10.25
15.50
ICICI Bank
5.00
19.00
2014-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
10.25
15.00
Bank of India
10.20
30.00
Indian Overseas Bank
11.25
15.50
State Bank of India
4.00
18.00
Private Banks
Axis Bank
10.15
15.50
ICICI Bank
5.00
19.00
2015-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
9.65
15.00
Bank of India
4.00
30.00
Indian Overseas Bank
10.45
14.95
State Bank of India
4.00
17.80
Private Banks
Axis Bank
9.50
24.50
ICICI Bank
5.00
19.00
2016-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
9.25
15.00
Bank of India
4.00
30.00
Indian Overseas Bank
9.80
14.50
State Bank of India
4.00
18.00
Private Banks
Axis Bank
8.55
16.50
ICICI Bank
5.00
22.25
2017-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
8.30
15.05
Bank of India
4.00
30.00
Indian Overseas Bank
9.45
13.90
State Bank of India
4.00
18.00
Private Banks
Axis Bank
7.05
22.00
ICICI Bank
5.00
22.25
2018-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
8.65
15.05
Bank of India
-
30.00
Indian Overseas Bank
8.10
13.75
State Bank of India
-
20.00
Private Banks
Axis Bank
8.03
12.15
ICICI Bank
6.00
22.25
2019-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
8.25
15.25
Bank of India
4.00
30.00
Indian Overseas Bank
8.05
13.50
State Bank of India
4.00
20.05
Private Banks
Axis Bank
6.80
20.15
ICICI Bank
7.25
22.25
2020*-
Public Banks
Min Interest Rate
Max Interest Rate
Bank of Baroda
7.55
15.25
Bank of India
4.00
23.75
Indian Overseas Bank
7.15
12.65
State Bank of India
4.00
20.00
Private Banks
Axis Bank
4.75
20.15
ICICI Bank
6.00
22.25
Note - All the figures are for the end of the December quarter.
*The figures for the year 2020 are for the September quarter.
This is a companion discussion topic for the original entry at https://www.gyandhan.com/blogs/education-loan-interest-rate