The interest rate on an education loan, like any other personal loan from public and private sector banks, is critical in determining the total amount you owe when the monthly equivalent installment (EMI) begins.
The increase in the Reserve Bank of India (RBI) policy rate in August 2022 to 5.40% led many banks to raise their interest rates on loans. According to RBI, the average rate on the 1-year MCLR, or lowest lending rates, in August 2022 was 7.65% for public sector banks and 8.53% for private banks, which is up 10 basis points from July this year. .
Forbes Advisor India has compiled a list of student loan programs and interest rates currently offered by India’s public and private sector banks to help you better understand the types of plans that would suit your personal financial needs. .
Public sector bank interest rates
The Indian government has merged a few public sector banks, so the interest rates of the merged banks will be those of the bank they merge with.
Student loan interest rates in September 2022
The above interest rates and student loan details are current as of September 8, 2022. While we update this information regularly, the interest rate and loan details may have changed since then. the last update of the page.
How do banks calculate interest rates on student loans?
Lending institutions offer different types of student loans and charge interest rates depending on whether students choose to study further, either in domestic colleges or abroad. Interest rates on student loans also vary by lending institutions, loan amount, repayment tenure, borrower’s credit profile as well as aspirants’ selected course and type of institution teaching provider offering the course, to name a few.
An interest rate set by the bank on a student loan plays a crucial role in its ability to pay the amount borrowed. Although the banks will not ask you to pay the sum during the moratorium period or while you are studying, it is better to consider paying at least the interest amount during the period. This will not only ease the burden of the EMI, but may also help you get some concession on the principal loan amount later on, as per the bank’s policy.
Most public and private sector banks in India offer a “variable interest rate” while lending an education loan. In this type of interest rate (ROI), the interest rate on your easy EMI is calculated based on the “base loan rate” plus the standard premium rate, or credit spread, markup, etc. .
Banks refer to the base rate, with floating components such as the repo-linked lending rate (RLLR) or the marginal cost of funds-based lending rate (MCLR), among others, while determining their interest rate. actual interest on student loans.
Notably, each bank’s base rate changes according to the change in the RBI’s repo rate (the rate at which public and private banks borrow money from the apex bank), which is revised every two months. Therefore, your floating EMI interest rate is revised based on the change in the RBI repo rate.
This change is however reflected after the “reset period” when the interest rate on your EMI is subject to revisions. The reset period in the RLLR type of floating component is three months, whereas it usually takes six to 12 months for the reset to take place in the MCLR concept of fixing the interest rate on your EMI.
In a nutshell: Final interest rate = Base rate (MCLR/RLLR/Repo rate) + Standard premium/Spread per year.
It would be best to consider this aspect of the floating interest rate calculation before choosing a student loan for your future studies. Nevertheless, banks usually provide the breakdown of the interest rates on your EMI versus the outstanding amount in your student loan sanction letter.
Education loan: things to consider
- Most banks offer concessions on the return on investment (normally 0.50%) to female/SC/ST/minority/physically handicapped students.
- Central government schemes like CGFSEL, ACSISOBCEBC, Padho Pardesh Program offer subsidies on the interest charged on the loan amount.
- Borrowers may qualify for tax exemption under Section 80E.
- Some banks also offer interest rate concessions to existing customers with good credit ratings.
- Banks may offer a reduction (up to 1%) in return on investment on the principal loan amount if the interest amount is paid in full during the moratorium period or during studies.
- Some banks may charge additional interest as a risk premium (up to 0.05%) if the lender has not taken out borrower insurance, which guarantees the settlement of debts after the disappearance of the insurer.
Frequently Asked Questions (FAQs)
Is there an interest rate concession I can take advantage of?
Yes — first, consider your relationship with your bank. Women’s groups/Scheduled Castes (SC)/Scheduled Tribes (ST) can also benefit. Then there are government schemes, tax exemption schemes, to name a few.
When should I start paying the EMI?