Summary of this article
Margin money reduces bank risk in education loans
Domestic and overseas loan margins differ by percentage
Families contribute upfront, shaping loan and repayment size
Margin money refers to that portion of the overall education expense that has to be arranged by the student or the family from their own pocket before the bank or financial institution extends a loan. The balance is funded by the bank. It’s a risk-sharing mechanism, as banks do not lend the full amount in case of expensive loans.
It also ensures that borrowers share the cost to stay invested in the investment (education). Margin money is levied for both overseas as well as domestic education loans, but the percentage needed varies depending on the cost of overall study and the destination.
For instance, if a course is priced at Rs 20 lakh and the bank finances 90 per cent, the borrower must give Rs 2 lakh as margin money. The bank will provide Rs 18 lakh. This ensures that families are well equipped financially, and banks have some collateral before lending.
Domestic Education Loans and Margin Money
For students receiving higher studies in India, requirements of margin money are normally minimal. According to the Reserve Bank of India (RBI) guidelines, loans of up to Rs 4 lakh do not need to have any margin money. For loans above Rs 4 lakh, banks usually request about 5 per cent of the loan amount as margin money.
For instance, if a student avails of a loan of Rs 6 lakh loan for a course in India, he/she would have to arrange Rs 30,000 as margin money. The bank would then fund the rest of the loan amount, i.e. Rs 5.70 lakh.
Margin money requirements for inland education loans are comparatively lower, since the overall risk is deemed less: the cost of tuition is lesser, expenses for living are simpler to forecast, and repayment is more predictable. Banks also consider the type of course, reputation of institution, and employability while calculating the margin money. Courses like engineering, medicine, and management professional courses would have slightly higher requirements, even for domestic loans.
Overseas Education Loans and Margin Money
Overseas education loans typically have higher amounts and expenses, such as tuition fees, residence costs, travelling, and insurance charges. Consequently, margin money is also more. RBI guidelines state that loans over Rs 4 lakh for foreign studies usually demand about 15 per cent margin money.
For instance, take a case where a student is booking a course worth Rs 30 lakh overseas. If the bank provides a loan for 85 per cent, the family will have to arrange Rs 4.50 lakh as margin money, and the bank will pay Rs 25.50 lakh. In reality, the percentage can fluctuate a bit based on the bank, study destination, course, and security or collateral offered.
More margin money is needed for foreign loans to cover risks of foreign exchange fluctuations, longer loan tenures, and the higher principal amount. Families must anticipate well in advance, since arranging these amounts becomes difficult without savings or availability of financial support.
Factors That Determine Margin Money
Margin money is influenced by various factors. The most direct factor is the loan amount: greater loans demand greater contributions. Course type and institution are important factors, because courses taken from institutions with high reputations might be perceived as having lower risk, thus possibly cutting down on margin requirements.
Scholarships or financial aid can also directly lower the cost in total and, as such, the margin money required. Banks also have internal policies; particular institutions might provide loans with lesser or nil margin money for certain courses, merit-based applicants, or collateral-backed loans.
Moreover, the RBI has permitted banks to include the entire estimated cost of study, including course fee, living allowance, and transportation, in calculating loans and margin money. This makes it transparent and avoids borrowers being insufficiently prepared for the overall amount.
Managing Margin Money
Families have various ways of handling margin money. Planning in advance and regular saving can ensure the availability of funds. Researching about various banks and financial institutions is essential, as some of them may have lower margin requirements or offer 100 per cent funded loans under special schemes. Scholarships and grants would reduce the margin money substantially.
Some banks even allow loans or fixed deposits to be topped up as collateral to meet margin money requirements. Being aware of such facilities can prevent delays in loan disbursal and allow students to focus on academic work rather than finances.
Margin money is a significant component of education loans, which is the amount of education expenditure borne by students and families. Foreign loans require greater contributions because they entail higher risks and costs, while domestic loans require lesser contributions. Loan amount, nature of course, scholarships, bank regulations, and collateral determine margin money.
