What is Margin in Education Loan?

Are you considering taking an education loan to fund your higher studies in India? If so, it’s important to understand the concept of margin money. But, what is margin amount in education loan? The term “margin money” refers to the portion of the educational expenses that you, as the borrower, need to fund on your own.

To illustrate what is margin money in education in a better way, let’s consider an example. Suppose the total cost of your education is Rs. 10,00,000 and the margin money requirement is 5%. In this case, you would be required to contribute Rs. 50,000 from your own funds, and the education loan would cover the remaining Rs. 9,50,000.

It’s essential for students and their families to be aware of the margin money requirement when applying for education loans.

Understanding What is Margin Money in Education Loan

Now that we have a basic knowledge on what is margin amount in education loan, let’s delve into its role in loan disbursement. Here’s how it typically works:

Calculation of Total Cost:

Before applying for an education loan, you need to determine the total cost of your educational program. This includes tuition fees, accommodation charges, books, and other related expenses.

Determination of Margin Money:

The lending institution specifies a margin money percentage that you must contribute from your own funds. This percentage can vary based on factors such as the loan amount and the institution’s policies.

Loan Amount Calculation:

The loan amount is calculated by subtracting the margin money from the total cost of education.

Disbursement Process:

The education loan is disbursed based on the approved loan amount. The funds are either released directly to the educational institution or provided to you, depending on the terms of the loan.

Use of Margin Money:

The margin money contributed by you is typically used to cover initial expenses or as a security deposit, depending on the requirements of the educational institution.

Repayment Structure:

The repayment structure of the education loan is based on the disbursed loan amount. You are required to repay the loan amount along with applicable interest over an agreed-upon repayment period.

Calculating Margin Money

Now, let’s explore how margin money is calculated. The formula for calculating margin money is straightforward:

Margin Money = Total Cost of Education × (Margin Money Percentage/100)

Let’s go through an example to illustrate this calculation. Suppose the total cost of education is Rs. 3,00,000, and the lending institution requires a margin money contribution of 15%. Using the formula:

Margin Money = Rs. 3,00,000 × (15/100)

Margin Money = Rs. 3,00,000 × 0.15

Margin Money = Rs. 45,000

In this example, the margin money required would be Rs. 45,000. You would need to provide this amount from your funds, while the education loan would cover the remaining Rs. 2,55,000 (Rs. 3,00,000 – Rs. 45,000) based on the margin money percentage and total cost of education.

Margin Money Requirements by Major Banks and NBFCs

When comparing margin money requirements among different banks and non-banking financial companies (NBFCs), there are a few factors to consider:

Loan Amount vs. Margin Money Percentage:

Evaluate how the margin money percentage influences the loan amount. Different institutions may have varying percentages.

Total Cost of Education:

Check if there are any restrictions on the types of expenses considered in the total cost of education.

Flexibility and Terms:

Assess the flexibility offered by each institution in terms of margin money payment and any variations based on the course or program.

Interest Rates and Repayment Terms:

Consider the overall terms of the education loan, including interest rates and repayment periods, in addition to the margin money requirement.

Eligibility Criteria:

Understand any specific eligibility criteria associated with margin money, such as the applicant’s income, credit history, or collateral requirements.

Public Sector Banks vs. Private Sector Banks

The margin money policies of public sector banks (PSBs) and private sector banks differ based on their respective approaches, ownership structures, and government regulations.

Here’s a general comparison:

Public Sector Banks (PSBs):

Government Influence: PSBs often have margin money policies influenced by government guidelines and regulatory frameworks.

Flexible for Social Objectives: Some PSBs may have more flexibility in margin money requirements for courses that align with national priorities or social objectives.

Government-Sponsored Schemes: PSBs may participate in government-sponsored education loan schemes with reduced or no margin money for economically disadvantaged students.

Interest Rate Subsidies: In some cases, PSBs may offer interest rate subsidies or concessions to certain categories of students, impacting the overall financial burden.

Private Sector Banks:

Market-Driven Approach: Private sector banks often adopt a market-driven approach, setting margin money policies based on their assessment of risk and profitability.

Varied Margin Requirements: Margin money requirements in private banks may vary widely based on the loan amount, course type, and the borrower’s creditworthiness.

Focus on Risk Management: Private banks may emphasize risk management, adjusting margin money requirements to mitigate potential loan default risks.

Customer-Centric Solutions: Some private banks may offer customized margin money solutions, considering the unique circumstances and financial capabilities of individual borrowers.

Strategies for Minimising Margin Money

To minimise the margin money you need to contribute, consider implementing the following strategies:

Scholarships and Grants:

Explore scholarships and grants that can help cover educational expenses and reduce the amount of margin money required.

Part-Time Work:

Consider taking up part-time work opportunities to earn extra income and contribute to your education expenses.

Negotiate with Lenders:

Discuss flexible repayment plans with lenders that can help reduce the financial burden and margin money requirement.

Cost-Saving Measures:

Opt for cost-saving measures such as community college or online courses to reduce overall educational expenses.

Conclusion

In conclusion, understanding what is margin in education loan and how it influences education loans is essential to students and their families. By being aware of margin money requirements, you can plan your finances accordingly and ensure a smooth disbursement and repayment process. Remember to research different banks’ policies, consider government schemes, and explore strategies for minimizing the margin money required. Download the Tata Capital app today to apply for an education loan and get the best interest rates and repayment options.