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Definition: Education Loan
In this type of funding, the loan is made to a student to fulfill the borrower’s educational commitments. It is a long term loan and the payments are deferred till the time the education is completed and for a period of 6-months after that or when the borrower finds a job, whichever is earlier. The interest rate charged is higher in these type of loans as compared to others due to high risk of repayment inherent in it and the reduced borrower’s repayment capacity.
Education loan forms the major part of NPAs of banks in India and government of India had announced a R2500 crore moratorium on education loans in the last budget. Education loans have become a major source of funding education expenses due to rising expenses and higher cost of living. The loan amount is not transferred to the borrower rather the payment is made directly in the educational institution’s account by the bank to remove the element of fraud in the lending process.
Although, now a days banks have started giving loans to students of elite educational institutions without any guarantor, majority of banks require either a parent or guardian to act as a guarantee for the contract.