Understanding Interest Free Education Loans to Study Abroad

Interest free education loan means that no interest will be charged on the education loan. In other words, the student or the lender has to repay the principal amount only. The main advantage of no interest education loan is that the financial burden on the students is reduced considerably. Let us understand this from an example. Suppose a student named Suresh took an education loan of INR 50 lakhs, then he has to return INR 50 lakhs only and not a paisa above. Had there been an interest of say 12%, then he had to return INR 56 lakhs, which is 6 lakhs above the principal amount. Now let us understand zero interest rate education loans in detail and whether is it possible to get it or not.

Is it Possible to Get 0% Interest Rate for Education Loans?

Offering no interest education loans is financially not possible for banks and lending institutions due to operational costs and risks involved with lending. While the idea of education loan no interest is attractive, it is not a feasible option in the current economic framework. But, there are ways by which you can reduce the interest by opting for subsidies, scholarships and government schemes. Let us see how and which subsidies can affect interest rates on your education loan.

Government Interest Rate Subsidies and Schemes for Education Loans

To help students overcome the financial challenges faced by students, the Indian government has launched several schemes to subsidize education loans and make them more accessible. 

Central Sector Interest Subsidy (CSIS) Scheme:

Launched in 2009, the CSIS aims to provide full interest subsidy during the moratorium period (course duration plus one year) on education loans for students from economically weaker sections (EWS). Key features include:

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  Eligibility: Students with an annual parental income up to INR 4.5 lakh pursuing professional or technical courses in recognized institutions in India.

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  Coverage: Interest subsidy on loans up to INR 10 lakh during the moratorium period.

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  Credit Claim: To process a credit claim, students have to inform their bank to upload the claim of interest subsidy in the portal maintained by the Canara Bank. The interest subsidy is credited directly to the loan account of the student.

Dr. Ambedkar Central Sector Scheme:

This scheme offers interest subsidies for abroad education to students belonging to Other Backward Classes (OBC) and Economically Backward Classes (EBC). The following are some of the key features of this scheme:

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  Eligibility: OBC and EBC students with annual family incomes up to INR 8 lakh and INR 5 lakh, respectively.

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  Benefit: Interest subsidy during the moratorium period on education loans for specified courses abroad.

Pradhan Mantri Vidya Lakshmi Karyakram:

This initiative includes the Vidya Lakshmi Portal, a one-stop platform for students who want education loans and scholarships. The following are some of the features:

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  Access: Information on various loan schemes from multiple banks.

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  Application: Facility to apply to multiple banks through a single application form.

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  Transparency: Track application status and access grievance redressal processes if required.

Padho Pardesh Scheme (Discontinued):

This scheme offers interest subsidies to students from notified minority communities pursuing studies abroad at the Master's, M.Phil., or PhD courses. The following are the key features:

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  Eligibility: Students belonging to minority communities with an annual family income not exceeding INR 6 lakh.

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  Benefit: Full interest subsidy during the moratorium period on education loans for overseas studies.

Please note that Padho Pardesh Scheme has now been discontinued by the government of India because of significant overlap with other similar schemes offered by different ministries.

Watch this video to learn more about government schemes and subsidies for education loans.

Challenges and Considerations when Applying for Subsidy on Education Loan

Education loan without interest is financially not feasible but government education loan subsidies provide considerable financial support, but there are certain important points that must be considered when applying for these subsidies:

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  Stay informed and updated: Many students remain unaware of these available subsidies and schemes, thus fail to get financial benefits.

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  Proper documentation: The application process requires multiple documents and assessments to prove eligibility. Always keep your documents ready and updated.

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  Timely Disbursement: Delays in subsidy disbursement can cause financial strain during critical periods of the academic journey. Always keep updated on the progress of your application.

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  Eligibility Criteria: Make sure that you meet all the eligibility criteria before applying for subsidies.

How to Lower Interest Rates on Education Loans? Tips and Strategies

You can follow the below-mentioned tips and strategies to reduce interest on your education loans and ease your financial burden:

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  Early repayment during the moratorium period: While many education loans offer a moratorium period during which repayments are not required but please note that interest continues to accrue. If you can make early repayments, even if it is partial, then you can decrease the total interest payable.

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  Refinancing your education loan: Sometimes other lenders offer lower interest rates or better terms, consider refinancing or transferring your existing loan. This can reduce the interest rate and thus you can save considerably.

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  Negotiating with your lender: You can always contact your lender and negotiate a lower interest rates. However, you need to highlight strong credit score, good re-payment record and stable income. Considering these points, your lender may lower interest rates for you.

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  Consider fixed interest rates: Some loans come with floating interest rates that can fluctuate based on market conditions. However, if you switch to a fixed interest rate, you can predict your EMIs accurately and thus it can help in financial stability and therefore lowering your interest rates.

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  Making partial pre-payments: Whenever possible, make lump-sum payments towards the principal amount. Reducing the principal reduces the amount on which interest is calculated, thereby lowering the total interest payable.

Other Alternatives to Interest Free Loans For Students

Since interest free loans are very rare, students can take government subsidies on education loans, but many times due to stringent eligibility criteria, students cannot avail the benefits of government subsidies. Therefore, the following are some of the alternatives:

Scholarships and Grants:

There are many study abroad scholarships and grants available based on merit, need, or specific criteria such as field of study. These do not require repayment and can significantly reduce educational expenses. GyanDhan offers its own merit-based scholarship for students who are planning to study abroad. You will receive INR 1 Lakh ( approximately USD 1,155) irrespective of the course and country of your postgraduate degree.

Institutional Financial Aid:

Many educational institutions offer financial aid programs, including fee waivers, pay-later payment plans, or work-study opportunities, to financially support students. For example, CSS profile provides financial assistance to international students in the United States.

Part-Time Employment:

Engaging in part-time work or internships can provide additional income to manage living expenses and ease the financial burden

Crowdfunding and Sponsorships:

Some students have successfully utilized crowdfunding platforms or secured sponsorships from organizations and philanthropists to fund their education.

While the prospect of interest-free education loans remains largely unattainable within the current financial infrastructure, the Indian government's subsidies, schemes, scholarships and grants play a very important role in reducing the financial burdens of higher education.

Frequently Asked Questions