Banks have hinted at a possible decrease in education loans interest rates in near future. In addition to this, they may also sanction these loans to students who cannot provide collateral or a guarantor to avail education loans.

Presently, banks offer education loans till Rs. 4 lakh with no collateral or guarantor clause. Loans above this amount and up to Rs. 7.5 lakh are advanced to those who can provide an eligible guarantor, but no collateral is needed in these cases. On the other hand, private sector banks are reluctant to provide education loans at all as recovery is difficult in case of defaults in education loans.

For these reasons, education loans are considered as risky loans and thus these loans usually have high interest rates as compared to other loans like auto loans.

In order to lower the riskiness of these loans and to persuade banks to advance more education loans, even without collateral or guarantor, Finance Minister P. Chidambaram has planned to establish a Credit Guarantee Fund before the end of this year. The fund is expected to help public and private sector banks to provide education loans up to Rs. 10, 000 crore up to the amounts of Rs. 7.5 lakh.

Finance Ministry had announced to set up such a fund in the previous budget, to allow improved flow of credit to worthy students.