Rise Of No-Collateral Education Loans: Are They The Future Of Student Financing?

In India, education loans showed a significant shift in student financing options. In 2019, the total number of education loans disbursed declined by approximately 25% from 2015 to 2019, and the average loan ticket size increased from INR 4.5 Lakhs to around INR 9 Lakhs during the same period. This indicates a growing reliance on higher-value loans.

In recent years, the loan amount remained high, but the loan applications showed substantial growth. Specifically, unsecured education loans saw a growth of approximately 80% in the fiscal year 2023 and continued with a 70% increase in 2024. This shift in the loan category is a consequence of their accessibility and ease of approval.

Furthermore, it opened the funding options to low-income families with additional benefits, such as the Central Sector Interest Subsidy Scheme (CSIS). This program provides a complete interest subsidy on eligible education loans during the moratorium period. So, these factors are contributing to the popularity of unsecured education loans for funding.

What are No-Collateral Education Loans?

Education loans where a collateral isn't required to borrow funding to sponsor the higher education. In this loan category, the approved loan amount depends on a student's academic achievements, employability, creditworthiness, and estimated future earnings. 

Thus, lenders trust in students' prospects rather than their immediate financial situation. The education loan without collateral enables higher education opportunities to deserving students.

Why Are No-Collateral Loans Gaining Popularity?

Five key reasons make no-collateral education loans in India popular and an attractive alternative in student financing.

Accessibility

Collateral loans have mandated collateral requirements that cover the entire education loan amount. However, with no-collateral loans, students can easily access funds for higher education without needing substantial assets.

Unavailability of Collateral

No-collateral loans are particularly beneficial for students or families who do not own significant assets or are unable to pledge collateral. This makes education loans accessible to a broader group of students.

Minimal Documentation

Applying without collateral requires less paperwork, decreasing the official verification of students and their families, simplifying the entire loan application process.

Quicker Approval Processes

Fewer documents require less verification and faster processing. This makes the loan approval process quicker and more efficient.

Potential Challenges and Risks

Being cautious is important in today's financial market, and knowing the essentials of education loans helps students weigh everything. To balance the weigh, students need to be fully aware of the specific risks and challenges associated with no-collateral education loans:

Higher Interest Rates

Unsecured loans often involve a co-signer who shares the responsibility of loan repayment. If the student or co-signer fails to make EMI payments, the loan becomes delinquent, which also impacts the credit scores of both individuals. Due to this increased risk, lenders typically charge higher interest rates to safeguard their investments.

Stricter Credit Assessments

During the loan application process, lenders evaluate the detailed financial background, creditworthiness, and repayment potential of both the applicant and co-signer. These stringent checks ensure that the loan is granted only when repayment is high.

Debt Burden

Upon completion of their studies, students with unsecured education loans often face significant repayment obligations. If, after graduation, the expected employment outcomes are low, this financial responsibility can create substantial stress and heavy debt.

Higher Default Risks for Lenders

Lenders assess default risks based on various factors, including the reputation of the university and the country of study. These perceived risks may lead to stricter loan conditions, more conservative lending practices, and higher costs for students.

Comparison with Collateral Education Loans

The financing decision can be made more profoundly when both the choices, collateral-based and no-collateral education loans, are compared together. 

Collateral-Based Loans

. These loan types offer lower interest rates due to reduced risk exposure for lenders.

. The repayment tenure is longer, easing the financial strain on borrowers.

. The secured education loan comes with lower default risks, enabling more favorable loan terms.

No-Collateral Loans

. The approval process is faster, which helps with timely enrollment in educational institutions.

. Their accessibility ensures opportunities for students from diverse economic backgrounds who may lack tangible assets.

. The higher interest rates and more stringent repayment terms are due to increased lender risks.

Regulatory and Policy Outlook

. Active government and RBI launch schemes and policies to support higher education. Popular initiatives like the Central Sector Interest Subsidy Scheme (CSIS) offer full interest subsidy during the moratorium period for eligible education loans.

. Under Section 80E of the Income Tax Act, students can claim a tax deduction on the interest paid on education loans for up to 8 years, providing long-term tax relief to families.

. The Tax Collected at Source (TCS) regulations also create a supportive tax structure. When education is financed through a bank or financial institution, there is no TCS on the first INR 7 lakh of the loan. Only a nominal 0.5% TCS is levied on amounts exceeding that, easing upfront financial pressure.

. For self-financed education attracts a much higher TCS rate of 5% on amounts beyond INR 7 lakh, signaling the government's intent to promote formal loan-based education financing.

. The State Bank of India also launched an additional unsecured SBI education loan, which sanctions a maximum INR 50 Lakhs education loan for Top 100 QS World Ranking Universities.

Conclusion

Collateral and non-collateral education loans both serve as reliable sources of funding in the market. However, the key factor that elevates the significance of no-collateral education loans is their inclusivity, offering opportunities to students who lack substantial collateral.

While this option does come with its inherent risks and challenges, continuous regulatory support and evolving lender practices indicate that unsecured education loans are poised to become an increasingly prominent mode of student financing in the coming years. Students and their families should stay informed and exercise caution to make well-informed financial decisions for their educational future.

Published on: Monday, April 28, 2025, 04:55 PM IST