What Factors Are Considered When Determining The Interest Rate For An Education Loan
What Factors Are Considered When Determining The Interest Rate For An Education Loan.Education is usually considered as one of the best investments people can make in their lifetime, but it is mostly expensive. In order to finance this journey many students opt for education loans which provides means to pay for tuition fees, cost of living, books, etc which is involved in the process of acquiring higher education. Another consideration is the rate charged on an education loan which determines the actual cost of the loan and affordability of the loan product.
But what of the interest rates for an education loan? This blog post looks at the different considerations used by lenders for setting the interest rate on an education loan, which will help you learn about the different factors which define this important aspect of funding for your education.
Comprehending Education Loan Rate of Interest
The effective interest rate on an education loan denotes the cost of credit availed from the lender. Also known as the annual percentage rate of charge it is stated in percentage of the amount of the loan and can be either fixed or can change periodically depending on the set terms of the loan. Reducing the annual interest rate will lead to lowering the total cost as will raising the annual interest rate increase the total amount of repayments during the term of the loan.
It depends on the individual lender institution, but rate is based on several key factors used to decide what rate will be given to any particular borrower. Now, let’s analyze how these factors affect the interest rate on education loan It would be pertinent to add here that this discussion is not exhaustive and a controlled experimental study needs to be conducted for this purpose.
1. Credit Score of the Co-Applicant
As students themselves to show credit history, Education Loans demand a co-applicant normally the parent/guardian of the student as a guarantee for education loan. Even for an education loan, the interest rate is directly proportional to the credit score of the co-applicant.
As for a co-applicant, a higher credit score means that the co-applicant is not a risky candidate as he/she has been proved to be a responsible debtor. Thus, the above details make it possible for the lender to offer a lower interest rate. On the other hand, a poor credit score indicates that the borrower is likely to default and in order to make a profit from the transaction, the credit provider may set a higher interest rate.
Tips to improve credit score:
It is also important to meet the previous loan or credit card repayments on time.
Reduce the number of credit facilities being used such as number of loans or credit cards possessed.
Review the credit report frequently for any inconsistencies or signs of identity theft.
2. Student’s Academic Record
ared by the co-applicant, the student cannot ignore factors such as his or her, earnings potential and academic achievements. Particularly a good academic performance when coupled with admission into a reputable university, the student is assured of a good job in the near future hence charging lower interest on the loan.
Factors like:
Standard scores obtained from academic years prior to the current year of testing.
Attendance of a better known institution (particularly if the institution is listed with acceptable institutions by the lender).
Job opportunities as determined by the selected area of specialization.
These can help in lowering of the interest rate on the education loan since they help in reducing the perceived risk on the side of the provider of the loan.
3. These are the reputation of the institution and the course.
Another vital factor that dictate the interest rate is the reputation of the institution where the student is studying or where he/she has intention to study. Lenders consider degrees from such universities and colleges less risky because the institutions in question are respected for providing high-quality education that increases the likelihood of finding a job.
Fields that are considered to be highly valuable, including engineering, medicine, management and information technology are regarded more positively by creditors, particularly if the candidates were trained in reputable institutions. This is so because the graduates from such courses and institutions end up taking well paying jobs, which would minimize on the rates of defaulting on the loans. In these circumstances, the interest rates may be somewhat lower.
On the other hand, if the course or the institution is relatively unknown or is deemed to have lower employment potential as far as repayment is concerned or generally, the lenders are likely to charge a higher interest rate owing to the perceived higher risk.
4. Loan Amount
Size of loan is another factor that defines the interest rate which is given by the borrower is another important factor. Education loans can also differ by the size – from small amount for a part of the tuition fee to large amount for the student studying abroad where even tuition and other living costs are high.
Typically:
Small loan products may have lower rates of interest charges as there is less risk assumed by the various lenders.
Big loans may be associated with higher interest rates, which may cover tuition fees and other incidental costs such as transport, accommodation, and books. Larger loans also imply longer repayment periods and therefore pose risks to lenders More risks here because they mean longer periods to be paid back.
Some financial institution also has different rates charged based on the amount borrowed depending on the slab rate. For instance, one interest rate may apply to loans below ₹7.5 lakh, while a different rate may apply to loans above ₹7.5 lakh.
What Factors Are Considered When Determining The Interest Rate For An Education Loan
What Factors Are Considered When Determining The Interest Rate For An Education Loan
5. Repayment Tenure
The repayment period plays a crucial role in context of education loan and it refers to the time taken by the borrower to repay the amount he has borrowed. This affects the cost of borrowing set by the lender to the borrower through the interest rate. In general:
Extended terms attract higher charges since the burden of the risk of external factors influencing the repayment capacity of the borrower is spread over a longer timespan for the lender.
Lower repayment a durations may be associated with lower interest rates since the lender’s cash is recovered faster hence the risk is lower.
Borrowers have to balance between the monthly repayment capability of the loan and the total amount of interest charged on the loan.
6. Collateral or Security
Lenders often offer two types of education loans: secured and unsecured.
A secured education loan ensures that the borrower provide security for the loan which can comprise of property fixed deposits, or other financial assets. Giving a form of security makes the risk of lending to be lower and therefore their rates of interest are comparatively lower than on the unsecured loans.
While there is no security required on an unsecured Education loan, the fact that the loan exposes the lender to more risk the interest rate charged on such loans is usually higher.
7. Government Grants on Subsidies and Loans.
Most governments provide financial incentives or even specific education loan programs for students belonging to economically disadvantaged strata, minorities, or persons of other special categories. These schemes usually follow interest rate charges that are below the market prices.
For instance, in India, the Central Government Interest Subsidy Scheme offers interest on loans that students belonging to economically weaker sections for the tenure of their course. As per this scheme, the interest is to be paid by the Government during the moratorium period, which includes the course duration plus one-year or six months after getting a job.
It is also relevant to verify if you are eligible for any government programs or subsidies that can help to decrease the interest rate factor.
8. Lender’s Internal Policies
Last of all, the particular policies of the lending company too influence the interest that is charged on an education loan. Different banks and financial institutions have varying risk appetites, and they may adjust their interest rates based on:
Market conditions.
Interest rates set by the monetary authority of a country like Reserve Bank of India etc.
Competitor rates.
When it comes to insurance, customer related factors within the model would be Customer Profile and Relationship (a customer who has been paying their premiums on time may be given a lower rate).
Conclusion
It is therefore important to understand what determines the interest rate of an education loan. Right from student academic performance, the varsity repute, co-applicant credit score to the availability of government funded schemes all contribute to deciding your loan cost.One should always make sure to shop around and the best thing one can do is consult an expert before taking up an education loan. The issue of interest structure can go a long way in even ensuring that one is able to obtain education loans that are easy for him/her to repay.
- Can I Apply For Multiple Education Loans For Different Courses Or Institutions?
- Can I Use an Education Loan To Study Abroad
- What Options Are Available For Deferring Education Loan Payments
- What’s The Typical Repayment Period For Education Loans?
- Are There Any Repayment Grace Period After Graduation For Education Loan
- What’s The Difference Between a Federal And a Private Education Loan?
- Are there Any Tax Benefits Associated With Repaying Education Loans
- How does The Repayment Process For Education Loans Usually Function?