Education loan has become quite common for students aspiring to study further for their higher education. But what happens when the loan applicant cannot pay the amount back? The burden of repaying then falls on the co-applicants.
Education loan insurance minimizes the financial risk of the education loan significantly. It provides the necessary backup in case things go south and the loan applicant is unable to pay the loan amount.
In some cases, like terminal illness, the entire amount is paid by the insurance company instead of the co-applicants, if the primary applicant has taken the loan insurance.
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What Is Education Loan Insurance?
As the name suggests, it refers to the insurance taken by an applicant on their education loan.
The current job market conditions, limited career opportunities, poor campus placements, local economy slowdown, and uncertainty in global economic conditions have resulted in a negative impact on the employment market.
The education loan insurance comes to the rescue if the primary loan applicant fails to repay the loan in dire situations like death, terminal illness unemployment, etc.
It also ensures that the burden of repayment does not fall on the co-applicants.
Finding the right education loan that fits your needs, as well as affordability, is confusing but not when you do it on the Edufund App.
The financial team with the app provides the right guidance so that the co-applicants do not have to suffer if any misfortune falls on the primary applicant.
Also read:Best banks for education loans in India
Is Education Loan Insurance Mandatory in India?
It is not compulsory to opt for education loan insurance as the requirement to do so varies from one lender to another. For loans taken from govt banks, it is not necessary for you to get insurance.
However, for some private banks or organizations, you may have to get insurance as a condition to take out the loan.
Most government banks let the applicant decide on the necessity of purchasing insurance on secured education loans.
Applicants applying for abroad education loans processed by private banks and NBFCs without collateral have to buy education loan insurance.
It is a mandatory requirement as the lender has not asked the applicant to pledge collateral security against the loan.
Also read: Questions to ask before taking education loan
💰 How Much Does Education Loan Insurance Cost?
The amount charged as a loan insurance fee varies from lender to lender as private lenders and government banks have different terms and conditions for the borrowers.
Government banks charge 0.5% to 1% of the entire education loan amount as an insurance fee for secured education loans. They offer loan insurance schemes via in-house loan insurance lenders.
Private banks and NBFCs charge 1.5% and 2% respectively of the entire education loan amount as insurance fees for unsecured education loans.
If you are misguided or confused about the education loan insurance terms and conditions reach out to the financial advisors at the Edufund App for a consult at the earliest.
What Is The Payment Process for Education Loan Insurance?
Once the education loan insurance is secured, the first question that comes to mind is whether the applicant will have to pay the required loan insurance fees to the lender immediately.
The best part about the insurance is that it is not required to make a separate payment for the education loan insurance fees as the due amount is adjusted with the total amount of the education loan.
For example, if the applicant has applied for an education loan of INR 30 lakhs and the insurance amount is INR 30,000 then the approved loan amount is INR 30 lakhs + INR 30,000 = INR 30.3 lakhs instead of INR 30 lakhs. The burden of paying the insurance amount does not immediately fall on the applicant.
The loan insurance fees depend upon the length of the loan tenure and if the applicant wants to lower the loan insurance fees he will have to lower the loan tenure.
Also read: Tips to manage aborad education loan payments
Benefits Of Education Loan Insurance
Education loan puts a significant burden on the applicant because the financial responsibility of repayment is on him. The co-applicant is equally responsible for the total amount if any misfortune befalls the primary applicant.
The benefit of purchasing education loan insurance is that the co-applicant will not have to pay the loan amount in case of non-repayment as the burden now falls on the insurance company.
Students who purchase education loan insurance get an additional 0.5% waiver on the loan interest rate. It is a relief for the applicant as the overall interest rates are reduced.
Also read: Collateral vs Non Collateral Education Loans
Quick Summary: Should You Buy Education Loan Insurance?
The education loan insurance acts as a protection for the co-applicant who will not have to bear the financial burden of paying the loan amount in case of non-repayment.
Applicants who do not have comprehensive knowledge about the education loan process and the related education loan insurance can consult our team of experts on the Edufund App and know about the whole process in detail.
FAQs on Education Loan Insurance
Is insurance mandatory for an education loan in India?
No, education loan insurance is not mandatory for all loans. If you’re taking a secured loan from a government bank, it’s usually optional. But if you’re taking an unsecured loan (without collateral) from a private bank or NBFC, insurance is often mandatory to reduce the lender’s risk.
What happens if I don’t buy education loan insurance?
If your lender doesn’t require it, you can skip it. But if something unfortunate happens (like critical illness or death), your co-applicant or family will be responsible for repaying the full loan. Insurance helps protect your family from this burden
Can I use a term life insurance policy instead of loan insurance?
Some banks may allow this, but not all. If you already have a term life insurance plan with a high enough coverage, you can ask the bank if it’s acceptable. Still, many lenders prefer their own loan-linked insurance policy.
What’s the difference between education loan insurance and student loan insurance?
Both terms are often used interchangeably, but technically:
Student insurance may refer to health/travel insurance for students going abroad. Make sure you’re clear on what the policy covers.
Education loan insurance protects the lender and co-applicant in case the borrower cannot repay.
