It may sound like taking on a massive financial burden for a lot of you to repay an overseas college loan to finance higher education. The repayment mechanism also concerns most students who accept the possibility of financing their higher education through a study abroad loan. In the midst of unforeseen circumstances, all of them are especially worried about who will repay the education loan. This is where the role of education loan insurance comes in The risk of repaying the overseas education loan falls on co-applicants in the overseas education loan scheme if anything unfortunate happens to the borrowers of the loan. Getting cover on an education loan via loan insurance in place could play a key role in unburdening the co-applicants of the creditor of the affected education loan.
Why do students opt for education loans?
Traditionally speaking, one of the most common ways to fund overseas education was through family savings, borrowing from relatives and friends, selling assets like land, gold etc. or taking an education loan. It was widely believed that only middle income earners chose to fund their education through student/education loans, but that simply isn’t true. In fact, many upper-middle and high income families resort to education loans to pursue higher education abroad. Why, you ask? Take a look at some of the advantages of availing a student loan to study abroad –
- Income Tax benefits under section 80E of IT Act.
- Opportunity for students to take their own financial responsibilities.
- Preserving their family savings.
- Building a good credit history.
What is the best way to go about financing your education?
Big universities abroad can be quite expensive, with fees running way past the Rs 50 lakh region. In such a case, it becomes very difficult to secure an education loan that covers such a huge figure. We believe that the right way to going forward is having a healthy mix of the following –
- Self-finance – Using parents savings, liquid assets etc.
- Scholarships & grants – Though in India the availability is quite limited, for meritorious students this may form a good chunk of the entire cost.
- Education Loans – Rising costs, to minimise financial burden on the ageing parents and tax benefits are three major reasons why more and more students and families are opting for education loans.
Meaning of Loan Insurance and its Importance
It is a well-known reality that most borrowers only consider the parents of the loan borrower as their co-applicants for overseas research loans. In the case of both guaranteed loans and an education loan without collateral, this is valid. Purchasing loan protection insurance guarantees that the cost of repaying the entire student loan balance of interest does not collapse on the co-applicants in the midst of an adverse circumstance. This can be an immense relief to government bank education loan borrowers, for whom even retired parents are appointed as co-applicants. In the course of your higher education, education loan insurance covers the whole education loan amount, regardless of the co-applicants, if the loan borrower suffers a catastrophe that will possibly lead to a terminal illness for the student.
Is it Compulsory to Opt for Loan Insurance?
The provision for protection covering an education loan ranges from lender to lender. When it comes to the government banks’ international education loan process, it is absolutely not necessary to obtain an education loan insurance along with the study abroad loan. Most government banks leave it to their borrowers to determine whether to buy it under any of the education loan schemes provided by them.
Again it is necessary to note that unless they wish to, students who have applied for guaranteed education loans with government banks do not need to buy education loan insurance.
When it comes to the NBFCs and private banks’ international education loan process, all applicants for an education loan without collateral have to buy insurance for an education loan. This is a legal condition that is required to be fulfilled by any student who applies for an educational loan without collateral. The primary explanation of why NBFCs are adamant about buying it is that none of them require students to promise any collateral coverage in exchange for a study loan abroad. Therefore if you intend to finance your higher education with the help of an education loan without collateral, you will be forced to buy premiums on an education loan.
Overall Loan Insurance Cost
Different debt insurance fees are paid by government banks and private holders with international research loans. Government banks charge roughly 0.5 percent to 1 percent of the entire education loan volume as an insurance premium on guaranteed education loans. In general, government banks provide credit insurance policies issued by their in-house lenders for loan insurance.
For instance, SBI provides overseas education loan insurance through the SBI Rinn Raksha scheme. The SBI Rinn Raksha loan insurance scheme comes with its own set of benefits.
As stated, purchasing an education loan from government banks is not mandatory.
Private banks charge about 1.5 percent of the overall loan amount as an education insurance premium, relative to the education loan fee paid by NBFCs and private banks for unsecured education loans, while NBFCs charge close to 2 percent of the total international study loan amount as an insurance fee. Because of the lack of collateral coverage, the procurement of education insurance is a necessary condition of NBFCs for students.
Payment Process to be Followed
The next thing on their mind after students finalise their decision to purchase an education loan is if there will be an urgent demand from the lenders for the insurance payments. So, the positive news is that candidates are not expected to pay their student loan insurance premiums individually. These payments are calibrated for the overall volume of college loans used by students.
The idea that the fees are strictly proportional to the duration of the educational loan period is another significant part that all students need to remember before buying overseas research loan insurance. Lower the tenure of the loan, lower the premium fees on loan.
How Much Amount Do Lenders Charge as Loan Insurance Fee?
| Lenders | Insurance Amount |
| Government Banks | 0.5% – 1% of the whole amount |
| Private Banks | 1.5% of the overall loan |
| NBFCs | 2% of the whole amount |
Reasons to buy student loan insurance
Protection against unforeseen incidents: Having an overseas education loan insurance policy provides security to the applicant in case of unexpected events or emergencies that may impact their ability to repay the loan.
Limited liability for family members: The coverage of an overseas education loan insurance policy does not extend to family members who are co-applicants. The primary beneficiary of the insurance is the student borrower.
Inclusive premium payments: Applicants do not need to make separate premium payments for overseas education loan insurance. The premiums are already included in the Equated Monthly Installments (EMIs) of the education loan.
Benefits Of Getting An Education Loan Insurance?
An education loan insurance has a lot of benefits. Borrowing a loan is always a serious commitment but that doesn’t mean there aren’t benefits to it. When you apply for an education loan for your studies abroad, a major bulk of the repaying liabilities falls on your co-applicant/co-borrower.
Apart from the fact that the education loan insurance schemes help applicants with their education loan repayment, there is another hidden benefit. Students who purchase the loan insurance scheme at the time of applying for their education loans, get to avail an additional 0.5% waiver on their education loan interest rate.A waiver in the interest rate of education loan insurance can come as a relief for many students, given the high cost of any education loan in present circumstances. This not only reduces the stress of repaying education loans but also contributes to reducing the overall interest rate.
What Does An Insurance On Education Loan Do?
For ‘study abroad’ loans, it is common for lenders to require the loan applicant’s parents as co-applicants, regardless of whether the loan is secured or unsecured. However, by obtaining loan insurance, you can provide assurance that the co-applicants will not be solely responsible for repaying the entire loan amount along with the interest in the event of an unforeseen circumstance, such as a terminal illness. In such situations, the insurance company will handle the repayment, providing additional financial security.
The Best Part!
A big financial burden is taken on by borrowing some sort of credit. This is especially valid in the case of a foreign loan scheme for education. When students apply for a student loan to fund their study overseas, their co-applicant/co-borrower immediately has the financial obligation to repay it, unless and until the student does not achieve financial freedom. In the wake of an incident like the death of the loan holder, their co-borrowers must be responsible for repaying the whole college loan. Hence, it is important that you have education loan insurance to cover you!
FAQs
1.What is education loan insurance?
Loan protection insurance ensures that the cost of paying back the entire education loan balance of interest does not fall on the co-applicants in the event of a disaster.
2.Is it mandatory to buy insurance for an education loan?
Although it will benefit you in many ways, if you plan on getting an education loan for abroad studies and are asked by your lending branch to purchase loan insurance, please keep in mind that this formality is not required. It is entirely up to the student to choose this option.
3.Does an education loan have insurance?
The cost of insurance coverage with an education loan is approximately 2-3% of the loan amount. The policy is based on the loan amount and is assigned to the bank. Banks offer this product when they make loans, but unlike a home loan, it is not required.
4.Do you need National Insurance for student loans?
To apply for benefits or a student loan, you do not need a National Insurance number. You will receive one if your application for benefits or a student loan is successful.
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