Top 10 Mistakes Students Make While Applying for Education Loans (And How to Avoid Them)

Pursuing higher education can be expensive, especially if you are studying abroad or in a premier institution. Education loans have proven to be a lifeline for countless students and families, filling the gap between desire and affordability, but many of those who apply for education loans make mistakes in the urgency to complete the process (mistakes that can delay the approval, add financial burden, or simply result in a rejection). 

Whether you are contemplating education abroad or study in India, education loan applications do not require great time and study, but they do require planning, research, and reasonable choices. From selecting the lender, to understanding terms of repayment, everything involved in pursuing an education loan requires attention; and still students repeatedly appear to make similar mistakes – that lump them into the poor applicant category – whether it be missing documentation, underestimating total cost, or failing to read the fine print.

Here are the 10 most common mistakes students make when applying for educational loans, and how to avoid them, importantly. So whether you are planning to apply for a loan to fund your education in 2025 or beyond, this guide will help you avoid pitfalls and make decisions that benefit your academic endeavors without the financial worries.

Let’s get started and provide you that will help you to apply for your educational loan, properly.

1. Not Researching All Loan Options

Not researching all options for education loans is one of the biggest and most common mistakes students make. Most applicants, especially students applying for the first time, are in a rush to secure funds and end up walking into the nearest bank or follow a friend’s suggestion, not realizing there may be alternatives that are cheaper, better or more flexible. 

Why This Mistake Happens

Students and parents are often stressed about timelines for admission deadlines and visa requirements. In this urgency they choose a lender that is convenient, rather than the best option. There are loads of education loan schemes, from government banks, private lenders, NBFCs, and even international financiers that students have no idea to consider, and potentially save money and provide better repayment conditions.

Government vs Private Lenders

Educational loans from public sector banks such as SBI, Bank of Baroda, and Canara Bank, are offered at substantially reduced terms through various schemes, including the Credit Guarantee Fund Scheme for Education Loans (CGFSEL), especially for borrowers from economically weaker sections. The loan terms generally include slightly lower rates of interest, a flexible moratorium, and no prepayment penalties.

On the other end of the spectrum, is private lenders and NBFCs (like HDFC Credila, Avanse, or InCred) who often provide better processing timelines, multi-collateralization, and ability to lend to a wider remit of universities (including some unknown and less reputable institutions globally). However, they will typically charge a higher interest spread on their loans, but could also charge a processing fee in addition to the interest amount.

2. Ignoring the Total Cost of Education

Another common mistake made by students applying for an education loan is only examining the tuition fees, while completely ignoring other expenses. This misuse of the loan process creates an underestimation of the actual loan amount needed and contributes to undue stress levels later on during the course of study. 

Why This Mistake Happens

Most students and parents simply focus on the admission letter that mentions tuition fees and they don’t consider literally anything else like accommodation, food, travel, books, laptop, health insurance, exam fees, visa charges.  All this limited thinking usually results in you applying for an amount of loan that will not be sufficient halfway through your academic journey, especially in the case of foreign students.

3. Not Understanding the Interest Rate Structure

One of the most critical aspects of getting an education loan is understanding the structure of the interest rate. However, this is an aspect that many students and their families ignore entirely. It’s easy to fall into the trap of picking an education loan based on only the “low-interest” rate being advertised without actually digging into how they calculate interest, when it takes effect, and how it will affect their repayments for years to come. A potential loan burden later can come as a nasty surprise.

Fixed vs Floating Interest Rates

The first distinction to understand is the difference between fixed and floating interest rates:

• Fixed Rate: The interest rate remains the same for the entire loan-tenure period. This means that no matter what happens in the economy, you know exactly what your EMIs will be (if there is no change in program budgets) and have certainty in your financial planning processes. Fixed rates usually are just slightly (ie. ~0.25%) higher than their floating counterparts.

• Floating Rate: The floating rate is defined as a rate that varies and is linked to some benchmark, which can be the repo rate or the MCLR published by the RBI. Floating rates usually start low but can increase over time, which can mean higher EMIs and/or total repayments. Most banks and NBFCs (especially private lenders) issue loans with floating rates for long-term loans like education.

If you are not aware of what you are getting into and it turns into a floating rate loan, you may have some surprises in store. 

Interest During the Moratorium Period

Most of the education loans have a moratorium period, which is usually equal to the duration of the course plus 6 to 12 months. During the moratorium period, the borrower isn’t required to pay EMIs, but the loan isn’t actually on hold. Interest continues to accrue during the moratorium period. 

Once the course and moratorium period are complete, the repayment period for education loans is usually 10 to 15 years. Over such long durations, even a minor difference in interest rate or compounding frequency can make a very big difference in the total amount paid back.

Here’s where the misunderstanding occurs:

• If the student chooses simple interest repayment during the moratorium, the interest doesn’t get added to the principal.
• But if the borrower chooses to defer all payments, the unpaid interest is compounded, it gets added to the principal amount, and you start paying “interest on interest” once repayment starts.
• This can significantly increase the total amount repayable.

Compounding Over Long Tenures

Once the course and moratorium period are complete, the repayment period for education loans is usually 10 to 15 years. Over such long durations, even a minor difference in interest rate or compounding frequency can make a very big difference in the total amount paid back.

For instance:

The total cost difference of repaying a ₹20 lakh loan at 10% compounded quarterly for 15 years, versus same loan at 9%, or simple interest during the moratorium may mean you pay Rs.10–15 lakh more, simply due to the accumulation of interest during the life of the loan.

4. Applying Without a Proper Co-Applicant or Collateral (If Required)

Numerous students jump straight into the education loan scheme without factoring in the need for a suitable co-applicant or collateral, particularly if considering a larger loan amount or applying to a government bank. Even if the student is eligible for a loan, it can lead to rejections, hold-ups, and, if you are really unlucky, rushing around which can disrupt the entire admission process.

Importance of Co-Applicants

In India, most education loans need a co-applicant: (usually a parent, guardian, or spouse). The bank looks into the ability, stability, creditworthiness and repayment ability of the co-applicant, particularly in the case where the student is income-less and doesn’t have credit history.

Some common errors include:

• Choosing a co-applicant that has either a low CIBIL score or irregular income stability.
• Just being a close relative would suffice- income documents, ITR, salary slips and even proof of relationship would suffice.
• Not including all relevant co-applicants, particularly where several members of the family provide income.
• If the co-applicant fails to meet the criteria that the bank requires, the application can be rejected, even if the student is not rejected.

Understanding Collateral for Secured Loans

For loan amounts above a certain threshold (usually ₹7.5 lakhs in public sector banks), students may be required to offer tangible collateral, such as:

• Residential property (house or flat)
• Fixed deposits
• Agricultural land (in some cases)

Failing to understand the collateral requirement or submitting incomplete property documents (like missing encumbrance certificates, legal ownership papers, or valuation reports) often results in processing delays.

NBFCs and private lenders may offer collateral-free loans up to higher limits, but often at higher interest rates and stricter co-applicant income checks.

5. Submitting Incomplete or Inaccurate Documentation

Documentation is one of the most common reasons for getting delayed or rejected on an education loan. Parents and students tend to act just prior to their commitments at college, and even forgetting a single document could delay and jeopardize the entire loan process.

Why Documentation is Important

Banks and NBFC operate a strict verification and compliance process. Every document you submit goes through the bank’s scrutiny to verify that they are consistent, correct, original and what they need for verification. Should they see that something is old, not matching or has something missing, the loan could be put on hold or even rejected.

Common documentation mistakes

Some of the most common documentation mistakes in education loan applications are:

• Outdated income proofs of co-applicants such as ITR more than two years old, or proof of employment from a previous employer are common mistakes.
• The application forms, or affidavits being unsigned, especially if the application is being submitted offline and printed.
• Missing college/university admission letter and fee structure.
• Name discrepancies from Aadhaar to PAN to marksheet etc.
• Submitting the original document if there is a possibility of having to resubmit something low resolution for an online application.
• Not having property documents or a valuation report for a loan if it is secured.

Documentation mistakes can mean return visits to the bank, confusion during the verification process, delayed disbursement and possibly affecting the timing for your admissions or visa.

6. Overlooking Prepayment, Processing, and Foreclosure Charges

When applying for an education loan, most students and their parents only focus on interest rate and EMI. It is quite common for potential borrowers to overlook these additional or hardly known charges, such as processing fees, prepayment penalties, and foreclosure charges, that increase the overall repayment burden over the life of the loan. Many borrowers ignore these costs at their own peril.

What are these Charges?

1. Processing Fees:  While applying for the loan, all public sector banks and most NBFCs charge a one-time processing fee. This processing fee typically ranges from 0.5% to 2% of the loan amount. You may think you’ll pay only a small amount in the beginning, but larger loans can add up quickly.

2. Prepayment Charges: If you are going to repay part of your loan before the due amount within the EMI payment period (After you service your education loan in part via, for example, a scholarship or part-time job income), lenders will charge you a prepayment fee. This is common for all fixed interest rate loans, but it can be more pronounced for private banks that offer fixed rates.

3. Foreclosure charges: If you decide to pay back your full outstanding loan balance before the life of the loan, you will have to account for foreclosure charges unless you are repaying a public sector bank (like State Bank of India) loan. A foreclosure charge typically is capped at 4% of the outstanding amount depending upon lender practices, particularly if it is a NBFC or private bank loan

Why Students Overlook These Costs

The urgency of securing the loan overshadows the fine print. These charges are not always disclosed clearly or are buried in the loan agreement. Many students assume they’ll repay exactly what they borrowed, plus interest without accounting for operational charges.

How These Charges Impact You

Let’s say you take a ₹20 lakh loan and plan to repay it in 10 years. You decide to foreclose the loan in year 6. If your lender charges 3% foreclosure fee, that’s ₹60,000—a cost you may not have planned for. Similarly, a 1.5% processing fee means ₹30,000 upfront, excluding taxes.

These costs may seem minor compared to the total loan, but they affect cash flow, increase your effective cost of borrowing, and reduce the savings from early repayment.

7. Not Checking the Moratorium Period Terms

Most students have the misconception that there are no payments due during this moratorium period, (which is the period that covers the coursework and an additional 6 to 12 months after the course is done). While you might only have to start repayment later of your EMI’s or make another similar monthly repayment, Interest is generally not deferred.

If you don’t understand the specifications of this moratorium period in your terms of service, you could be building unexpected and accumulating debt and financial stress later.

What is a Moratorium Period?

In general, a moratorium is a temporary relief period in which student are not required to pay EMI’s, during which the moratorium period generally consists of the full duration of the course work and An additional Buffer Period (typically 6-12 months) after the course is completed or until the student can find full-time employment. A moratorium does not mean the loan is interest free.

Key Terms Students Usually Overlook

• Simple Interest Accrual: Most government banks charge simple interest on a moratorium which is either required to be paid monthly, or capitalized (added to the loan).
• Compound Interest by NBFC: Many of the private lenders or NBFCs charge compound interest in this period, which will greatly increase the principal amount before repayment.
• Optional EMI Payments: Some banks allow students to start paying partial EMIs or interest during the moratorium to reduce future burden — but this is optional and not clearly communicated unless asked.

Real-World Impact

Let’s say you take a ₹10 lakh loan at 10% interest for a 2-year course. If simple interest accrues during this period and you don’t pay it, ₹2 lakhs (₹10L × 10% × 2 years) gets added to your principal. You now owe ₹12 lakhs, not 10.

With compound interest, the impact is even larger, the interest itself earns interest, compounding your total liability.

8. Applying Too Late in the Admission Process

A lot of students make a big mistake: applying for an education loan far too late – typically, after receiving the admission offer, or sometimes developing serious concern, near the visa application or even fee payment deadline. This writing will examine the troublesome consequences of applying late for an education loan and why you need to be worried about missing key lender actions.

Why Timing is Important
Education loans consist of various steps:

• Selection for the right lender
• Uploading a complete set of documentation
• Depending on whether a co-applicant and/or collateral are needed,
• Co-applicant and collateral evaluation
• Sanction letter issuance
• Disbursement

Each of these will take a few days to few weeks depending on the lender and your profile.

Consequences with Timing

• Missed University Deadlines: Universities will typically expect a fee to be paid or a conversion to a fully fit (international) tuition fee applied by a fixed date. Missing deadlines due to delays in loan sanction approval could also mean you’ve forfeited your seat offer to study.
• Visa Rejection Risks: If the student is hoping to study that international collage later than a few months of expiration, the university will automatically assume the student is funded and the embassy file will require loan sanction letter and/or funds in advance by months or simply make the file complete with evidence of your financial background of educational expenses for the duration of studies, prior to visa issue delay.
• Stress and Limited Choices: Last minute lodging or student housing means you will need to go with whichever lender approves fastest; in these situations, lenders see students are panicked and raising housing deadlines, and then what typically clients do, lenders only experience. They can do whatever they want when students are raising what they don’t know about with stressing in other situations. Students forget the pledge they signed.

9. Not Using an Education Loan EMI Calculator

Calculating the EMI (Equated Monthly Installment) amount that will need to be repaid before signing the education loan document is one the most underestimated but necessary steps in the education loan process. Most students, along with their families skip this step, only to realize later that they cannot afford the monthly repayments and experience financial strain or possibly default. 

The Importance of EMI Calculation

An EMI calculator provides a fair estimation of the approximate amount that you will have to pay each month, post moratorium, given factors as follows: 

• Loan amount 
• Interest rate (fixed or floating) 
• Repayment tenure 
• Mode of repayment (EMI during or EMI after moratorium)

This uncertainty can potentially impair students due to some students underestimating their financial liabilities or students opting for a short tenure with higher EMIs to just reduce the total interest which can be counterproductive. 

Impacts of not Forecasting EMI

• Borrowing more than required or selecting a costlier repayment structure. 
• Having challenges with meeting living expenses thereafter the course while repaying loans. 
• A reputational risk to the co-applicant if they are the ones providing support. 
• Impact to credit score if EMIs are missed or paid late.

10. Ignoring Loan Insurance or Not Reading the Fine Print

One of the most expensive mistakes that students can make when applying for an education loan is failing to recognize any loan insurance, or not looking closely at the contract. In the rush to get money, applicants usually skip past the most critical clauses that will have a long-term financial impact. 

Disclosure about Loan Insurance

Loan insurance, even when optional, provides a financial safeguard to the borrower and the co-applicant. In the unfortunate circumstance of the borrower’s death or permanent disability, loan insurance will protect the outstanding amount due, shielding the family members from any repayments.

Not taking insurance may be viewed as saving money initially, but it can leave dependents vulnerable should any unforeseen events arise. 

Hidden Clauses to Look out For

In the loan document(s) all of the clauses are buried in fine print. The clauses are legally binding, yet borrowers often ignore them. Some examples are:

• Penalty for delayed EMIs
• Processing and conversion charges (eg. fixed to floating)
• Disbursement event – amount of money disbursed at once or in tranches
• Prepayment or foreclosure penalties

Whatever the case may be, not understanding the terms could lead to delay in payment, legal fees for either misinterpretation or unauthorized fees; or in the future, inability to restructure a loan.

How to Avoid These 10 Common Education Loan Mistakes

Obtaining an education loan is a significant financial commitment. Avoiding the pitfalls that could cause you years of stress and problems may be possible. Below are the best ways to avoid the top 10 mistakes:  

• Consider All Loan Options: Don’t be hurried into the first loan offer without researching and comparing it against a selection of other options, including government schemes, private bank loans, NBFCs, interest rates, repayment and eligibility terms.
• Calculate the Full Cost of Education: Go beyond tuition. Include living expenses, travel, insurance, books, and visa fees while calculating your loan requirement.
• Understand Interest Rates Clearly: Learn the difference between fixed and floating interest rates. Know if interest is charged during the moratorium and how compounding affects your total repayment.
• Make sure the Co-Applicant/Collateral is set up correctly: Know your co-applicant documentation and requirements and the documentation required on secured loans. Confirm that your guarantor meets the requirements for eligibility with your bank.
• Cross Check Documentation: Make sure every item is completed, signed; and that you have valid documentation as proof of income, admissions, identification, etc., so that your application does not get delayed in the processing queue.
• Watch for hidden fees: Read through your loan brochure or sanction letter to identify any penalties for prepayment, processing fees, charges for conversions, and conditions for foreclosure.
• Confirm the terms of the Moratorium period: You should know, if interest is payable during your course and moratorium. This will help you budget better on your expectations without surprise interest accumulation.
• Apply early: Don’t leave your application till the last moment. We suggest that you apply for your loan the same time you have received your admissions letter to eliminate any unforeseen delays in disbursement or culminating visa documentation.
• Use an EMI calculator: You should use an EMI calculator you relate with realistic monthly outflow expense expectations before taking the loan. Source the best EMI payment that fits your anticipated future income, and your lifestyle.
• Do your homework and read the fine print: Make sure to read all clauses in the agreement you sign, especially the clauses surrounding disbursement, repayment, penalties, and insurance. It is often worth the money to buy a loan protection plan just for peace of mind.

FAQs: Top 10 Mistakes Students Make While Applying for Education Loans

Q. What is the biggest mistake students typically make when applying for education loans?

A. The biggest mistake is not doing the research and comparison of loan options available to them, which leads to higher interest rates and minimum terms.

Q. Why is it important to think about the total cost of education, instead of just the tuition fees?

A. Because there are many expenses that go along with education like accommodation, travel, books and supplies, insurance, etc. Not considering all expenses leads to under-borrowing, and increases financial stress and difficulties down the road.

Q. What is the difference between fixed and floating interest rates in an education loan?

A. Fixed rates are fixed for the whole term of the loan. Floating interest rates change with market benchmarks, it will effect the EMI repayment.

Q. Who is a co-applicant, and why are their documentation worthwhile in the loan process?

A. A co-applicant is generally a parent or guardian of the student. The co-applicant is co-responsible for repayment. The borrower documentation includes income and credit profile documentation for the approval of application.

Q. What documents do I generally need to apply for an education loan?

A. Commonly required documentation includes admission letter, ID proof, co-applicant income proof, student academic documents, and collateral documents if it’s applicable.

Q. Are there hidden charges that are associated with education loans I need to know about?

A. There are usually hidden charges like processing fees, prepayment fees, foreclosure fees, and conversion fees that increase the overall cost.

Q. What is a moratorium period in education loans?

A. It is the period during your course and 6 to 12 months after you have completed your course that you will not pay the principal amount, but interest may accumulate on the loan.

Q. When should I apply for an education loan?

A. Apply as soon as you can, preferably once you confirm your admission, and you will ideally avoid any delays relating to loan disbursal and visa.