Applying for an education loan? Avoid these costly misconceptions

From credit scores and co-borrowers to collateral, margin money and tax benefits, understanding these education loan misconceptions can help borrowers avoid costly mistakes

Education loans are often seen as a gateway to higher education, but many students have an incomplete understanding of how banks assess loan applications. A recent Kerala High Court ruling reaffirming banks' right to consider the credit history of parents or other co-borrowers has underscored that education loan approvals involve much more than a student's academic merit or future earning prospects. Here are some of the most common myths about education loans—and the facts every student should know.

 

Do banks look beyond a student's career prospects?

 

According to industry experts, lenders assess all relevant risks before approving any loan. In the case of education loans, especially high-value ones, they evaluate the student's future repayment capacity based on factors such as the reputation of the institution, the chosen course, and its placement record.

 

"However, these are not the only considerations. Lenders also examine the credit history and credit score of the student and, where applicable, the parent or other co-borrower/guarantor, along with income, existing liabilities, and other standard eligibility criteria," says Raoul Kapoor, co-chief executive officer, Andromeda Sales and Distribution Pvt Ltd.

 

Impact of a parent's credit score on education loan

 

The credit profile of the parent or co-borrower is one of the key factors in an education loan application. "If the parent or co-borrower has a poor credit score, a weak repayment history, or high existing liabilities, the lender may reject the application, regardless of the student's academic credentials, the reputation of the institution, or the course's placement prospects," says Kapoor.

 

The lender also assesses the co-borrower's income and overall repayment capacity before taking a decision.

 

Is a co-borrower equally liable for repayment?

 

A common misconception is that the co-borrower is merely a formality. In reality, the co-borrower is equally responsible for repaying the loan. If the student defaults, the lender has the legal right to recover the outstanding dues from the co-borrower in accordance with the terms of the loan agreement.

 

What costs can an education loan finance?

 

Education loans typically cover tuition fees, books and study materials, hostel or accommodation charges, travel expenses for overseas education, and other essential academic expenses, including certain mandatory equipment, where applicable. "However, banks prescribe loan limits that vary for domestic and overseas studies. The loan is generally disbursed against actual expenses, and students may have to submit bills, invoices, or other supporting documents before the funds are released," informs Kapoor.

 

What affects education loan interest rates?

 

A common misconception is that every borrower will get the lowest advertised interest rate. In reality, the applicable rate depends on factors such as the applicant's profile, the co-borrower's creditworthiness, the course, the institution, and the loan amount. "Borrowers should also check whether the loan carries a fixed or floating rate and compare the overall borrowing cost across lenders instead of relying only on the headline interest rate," suggests Ankit Bagadia, director-business, BankBazaar.com.

 

Margin money: Common borrower mistakes

 

Many students misunderstand margin money and are unsure whether they need to contribute funds before a loan is disbursed. Margin money is the borrower's share of the total education cost, while the lender finances the rest. However, the requirement varies by lender, loan amount, institution, study destination, and credit policy.

 

"Before applying, students should understand the total cost of education—including tuition, living expenses, travel and study materials—and check whether any margin contribution is required. Some education-focused lenders may finance up to 100% of the total cost for eligible borrowers, so it is important to compare loan terms carefully before making a decision," suggests Yogesh Rawat, chief business officer – student lending international, Avanse Financial Services.

 

Borrower misconceptions about collateral

 

Collateral is often misunderstood as either mandatory for every education loan or not required at all. In reality, there is no one-size-fits-all rule. "Lenders decide whether collateral is needed based on their credit policy, considering factors such as the loan amount, the applicant's profile, the course, and the institution. While some borrowers may qualify for unsecured loans, others may be required to provide collateral as part of the credit assessment," informs Bagadia.

 

Rawat adds that collateral is primarily a risk-mitigation tool, not the sole determinant of loan approval.

 

Misconceptions about the moratorium period

 

The moratorium is often mistaken for a repayment-free period with no financial cost. In reality, while EMIs are usually deferred until after the course or a specified period, interest typically continues to accrue. "Some lenders allow borrowers to pay the interest during the moratorium, helping reduce the overall loan cost. Understanding these terms can help borrowers plan repayments more effectively," informs Bagadia.

 

Education loan repayment myths

 

Many borrowers wrongly believe that education loans are more lenient than other loans and that defaults have few consequences. In reality, every missed payment is reported to credit bureaus, affecting both the student and the co-borrower, usually a parent. "A default can damage credit scores, making it harder to get future loans, including home loans. Government interest subsidy schemes also do not waive the repayment obligation. Education loans must be repaid like any other loan," suggests Anooj Mehta, partner, 1 Finance, a personal finance platform.

 

Tax benefit misconceptions

 

Many borrowers assume the entire education loan repayment qualifies for a tax deduction. In reality, only the interest paid is eligible under Section 80E, not the principal. "The deduction is available for a maximum of eight years from the start of repayment or until the interest is fully repaid, whichever is earlier. It is also available only under the old tax regime," says Mehta.

 

Borrowers should compare both tax regimes before filing their returns and ensure they retain the lender's interest certificate.