April 22, 2019
The rising cost of education across the globe has led many students to seek help from lenders such as Pubic/Pvt. Banks and Non-Banking Financial Companies (NBFCs). Unlike in India, higher education is not subsidized by the state in countries like the US and UK. In other words, institutions have to manage a substantial portion of their expenditure through tuition fees. This is the reason why it is almost impossible for Indian students to study in universities in those countries without external financial help in the form of education loans.
Each year, hundreds of thousands of students apply for Education Loan in India to finance higher education either in India or abroad. Banks lend money to students in the form of secured and unsecured Education Loan. However, an application for Education Loan does not necessarily lead to sanctioning of the loan by the lending institution. There are several instances students’ loan applications getting rejected due to one reason or the other.
In this blog, Student Cover highlights some common reasons that lead to the rejection of education loan applications for either secured or unsecured loans.
On submission of false information – it is the duty of both lender and borrower to submit correct and factual information while entering into a loan agreement. If the information furnished by the borrower such as name, address, educational qualification, nationality of the borrower or the guarantor, pending court cases etc. are found to be false, the lender has every right to reject the education loan application. The borrower is, therefore, advised to provide only truthful and factual information, supported by valid documents, while applying for education loan.
Collateral requirement not met – While filing an application for secured education loan, the lender expects the borrower to keep the documents of assets, such as land or property or any other fixed asset, as mortgage. This insures the lender against any possible default by the borrower in future. At times, banks undertake verification exercise to ensure the veracity of the documents submitted by the borrower.
Banks can reject the secured loan application, if, during verification, it is found that:
# Property documents are not genuine or do not suffice the required ownership right of the borrower,
# Property is facing any dispute court of law or is already mortgaged against some other loan.
Incomplete documentation – While processing education loan, banks require borrowers to submit verified copies of a certain set of documents such as PAN card, Passport, address proof, birth certificate, certificates of educational qualification etc.
If the borrower is unable to submit the documents as required by the lender, the education loan might get rejected. In certain cases, borrowers are also required to present character certificate and no-objection certificates (NOC) from concerned authorities.
The creditworthiness of the borrower – Several banks and NBFCs in India provide unsecured loans to students to finance their higher studies in India or abroad. These loans are given not against collateral but on the basis of the creditworthiness and financial strength of the borrower.
The creditworthiness of the borrower depends on a number of factors such as the source of income, CIBIL score, past loan repayment record, the likelihood of employment after completion of the said course etc. If the bank, in its wisdom, concludes that the borrower does not meet the required criteria of creditworthiness, it may reject the education loan application of the borrower.
Nationality and tax status of the co-applicant – Banks and other lending institutions in India provide secured and unsecured education loans only to those students who are Indian nationals. This applied equally to co-applicants and guarantors as well. If the co-applicant in case of unsecured or secured education loan is a foreign national, the loan application would be rejected by the lender. Also, if the co-applicant is India but is currently living or working abroad and whose income does not fall under the jurisdiction of income tax authorities and laws in India, then too the loan application is not accepted by the lenders.
For the application to be accepted, the applicant, co-applicant and guarantor must both be Indian nationals and should come under the purview of income tax laws in India. However, those Indians who are currently living abroad but whose income falls under the jurisdiction of income tax authorities in India are eligible to be co-applicants or guarantors.
Institution not recognized – This is mostly applicable in case of unsecured education loans. Before sanctioning education loan to students, the lenders seek to verify the credentials of the institution where the student has applied for a course. Educational institutions that are either top ranked or highly accredited by reputed accreditation agencies are given preference over those that are neither top ranked or accredited. These days, almost all banks and NBFCs keep a list of recognized institutions in India and abroad.
Country where the institution is located – While sanctioning loans, not only the institution but also the country where the institution is located plays a key role. Those students who apply in institutions situated in countries in Western Europe or North America have higher chances of getting their education loan applications accepted by lending institutions. This is because those countries have a good reputation of providing quality education as well as better job prospects after completion of the course.
Past repayment record – If a borrower has a bad track record in repaying any previous loan, it is very likely that his or her education loan application for higher studies, either in India or abroad will be rejected by the lender. This is because banks and NBFCs, do not want to take the risk of giving loans to those who have defaulted on previous loans or have not been prompt in meeting their loan repayment obligations in the past. These days most banks use CIBIL score and report as a reference for determining the possibility of default on education loan by the borrower.
The course applied to – Certain courses such as those in Science, Technology, Engineering and Mathematics (STEM courses) have much greater career prospects than those courses that fall under the category of ‘Humanities’. Banks and lending institutions often reject loan applications, especially those for unsecured education loans to students who have secured admission for courses that do not fall under STEM category.
Language requirement not fulfilled – English is the “lingua franca” of most Commonwealth and North American countries. Any student applying for a course in institutions in those countries has to provide proof of their proficiency in both written and spoken English. Students can do this by undertaking tests (TOEFL & IELTS). If the student is unable to secure good marks in those exams, he or she is not eligible to either pursue higher education or take up a job in those countries. At times, banks reject the education loan applications of students who have either not undertaken those language tests or do not have sufficient score.
We, at Student Cover, hope that the students applying for education loan would find this blog informative and helpful.
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