Why does your credit score matter when applying for an education loan?

The cost of higher education has increased exponentially and far outstripped the capacity of the majority of Indian households to afford it from their own savings. An MBA or a postgraduate degree abroad may range from 20 lakh to 40 lakh, and even for top institutions in India, fees are gradually going up. Due to this, education loans are increasingly being used by students to meet the gap. RBI data suggest that the education loan outstanding portfolio reached 1.31 lakh crore in November 2024.

 

When taking out a loan, students and families usually concentrate on issues that have a direct impact on their future finances, interest rates, processing charges, processing period, and repayment duration. The three-digit credit score, a three-digit value between 300 and 900 that indicates past borrowing history and repayment habits, is usually something that they don't pay attention to. Most banks require a minimum cut-off of 680 for education loan applications, whereas anything above a score of 720 is regarded as a good score and increases the likelihood of smooth approval considerably. As students themselves may not have extensive credit histories, lenders consider primarily the co-applicant's score, typically the parent or guardian.

 

This score is not computed by banks themselves but by credit bureaus like CIBIL, Experian, Equifax, and CRIF Highmark, who have a thorough record of the borrower's financial conduct. The score is derived on multiple factors: Repayment history, utilization of credit, and credit history age. Briefly, the credit score is a picture of financial discipline.

 

DETERMINES ELIGIBILITY

The majority of lenders apply a credit score as the initial screening. A high score of over 720 will enhance the possibility of getting the loan sanctioned, but a poor one can result in rejection or lower sanction amount. For example, you might receive only 20 lakh sanctioned when you really need 35 lakh, thus creating a large funding shortage. In contrast, a good score not only opens the door to higher amounts of loans but also provides better conditions.

 

IMPACTS LOAN TERMS

Impact on interest rates is also considerable. Education loans are normally given by public sector banks at 10–12% per annum for applicants with good credit profiles. Borrowers with lower scores, however, end up going to private lenders or NBFCs, where charges can go up to 13–16% per annum.

 

Take this case for instance: you borrow an education loan of 30 lakh on a two-year postgraduate course with a complete moratorium and a tenor of 15 years. At a rate of 10%, the overall repayment comes to about 68 lakh. But if the rate goes up to 13%, the repayment comes to around 83 lakh. That 3–4 percentage point differential does not appear enormous on paper but translates to a difference of 15 lakh during the term of the loan. 

 

INFLUENCE THE SPEED OF LOAN APPROVALS

A good credit score also hastens the process. Students with better credit histories get quicker approvals, smoother loan top-ups during the course, and greater freedom of choice in repayments. Conversely, poor credit means longer delays, more guarantors, and more stringent repayment terms, all stressors in an already trying academic experience.

 

COLLATERAL VS. NON-COLLATERAL LOANS

For secured education loans, credit score is just one of a number of parameters used. But in non-collateral loans, which are the new rage with students, the credit score becomes determinative. In the absence of security, lenders rely heavily upon the borrower's or co-applicant's creditworthiness.

 

As Ankit Mehra, the CEO of GyanDhan, says: "A credit score might seem like a mere number, but for students applying for loans, it can determine not only if you are approved, but how economically your education is going to be over the long term."