What is Education Loan Underwriting?

.Ever wondered why some education loan applications breeze through while others hit a dead end? The answer lies in the underwriting process. Grasping the education loan underwriting process could be a great boost to your education loan approval chances. This process is like a behind-the-scenes audition where banks decide if you are a worthy candidate. Fun fact: most student loan rejections happen right here!

Underwriting isn’t a one-size-fits-all process; it varies from one bank to another. Government education loans often have a more relaxed underwriting process compared to those from Non-Banking Financial Companies (NBFCs). If you are planning to get an education loan and want to know everything about the underwriting process of student loans, then read this detailed article below. 

What is Underwriting in Education Loans?

Underwriting is like a lender’s detective work to see if you can repay a loan. Banks and NBFCs have special employees who dive deep into your credit history, financial background, and property details to assess the risk of lending to you. Using your PAN, they will check your CIBIL score and get all the details regarding the loans and credit cards in your name. They will do the same for the co-signer and check whether their income is sufficient to pay off all the existing debts and the new debt. They use something called the Debt-to-Income (DTI) Ratio to determine whether you are eligible for a new loan and how much you can borrow. We will discuss what DTI is in detail ahead of time. 

The underwriting of education loans is a crucial part of the loan processing process. If a student is applying for a student loan to study in tier 3 or lower college and the course they have selected is not job or skills-oriented, then it is a high risk for the bank to sanction him a loan. This kind of risk is quickly flagged during the underwriting process, and the loan is usually not granted. 

To understand what is loan underwriting, we can take the example of Rohan, who is an outstanding student and has received his admission letter for an MBA in a B-school. He applied for a loan of ₹10 lakhs with a co-signer. However, the bank denied his loan request during the underwriting process. This happened because the bank decided that his co-signer’s income was not enough to pay back the loan if Rohan defaulted on his EMIs in the future. To remedy this situation, Rohan pledges a collateral asset in his next loan application, after which it passes the bank’s underwriting process. 

How Does the Underwriting Process Work? 

Here is a start-to-end underwriting process for education loans that every student should read before any loan application.

  1. The process of underwriting starts with the education loan application submission when the borrower submits all the required financial and education-related documents.
  2. Then, the loan officer of the financial institution will conduct the preliminary review, which includes checking the credit score and reviewing the co-signer’s income, job role, or business income. 
  3. The bank will now verify all the details submitted by the student, such as educational certificates, admission letters, bank statements, salary slips of the co-borrower, collateral details, etc. 
  4. Now, the loan application is sent to the underwriting officer, after which he analyses all the risk factors of the borrower and weighs them against the collateral and the cosigner’s ability to pay it back.
  5. The underwriter submits his report, and then the lender decides if the student meets all the requirements and processes the education loan accordingly. 
  6. If the risk is low or not, then the student loan is processed smoothly. If the risk is medium, then additional collateral is asked for by the bank; however, if the borrower poses too high a risk, then the loan is rejected by the bank.

Factors Considered in Underwriting

By now, you must have understood the importance of underwriting in education loans; thus, it is time for you to know about the factors that are usually considered during the underwriting process. You can find these factors below:

  1. Legal and Program Requirements: The very first thing an underwriter confirms is that you meet all legal requirements to enter into a loan agreement. This includes verifying your identity and citizenship.
  2. Credit History: Underwriters review the credit report and CIBIL score to see how the co-borrower has managed debt in the past. They look for any red flags like late payments, defaults, or a high number of credit inquiries. A good credit history indicates that he is reliable in repaying your debts, which increases your chances of loan approval.
  3. Repayment Capacity: This refers to your ability to repay the loan based on your current income and existing financial obligations. Underwriters calculate your debt-to-income ratio by comparing your income against any recurring debts. A lower ratio suggests you have sufficient income to handle additional loan repayments comfortably.
  4. Collateral Value: Since the primary goal of underwriting is to mitigate the risks banks assume when providing education loans, offering sufficient collateral can alleviate any bank concerns. For example, suppose you’re seeking an education loan of ₹20 lakhs, and you pledge an asset worth ₹30 lakhs as collateral. In that case, the bank will likely have no reservations about approving your student loan.

Also Read: What is a Collateral? – Understanding its Meaning, Purpose, Types and Importance

  1. Academic Performance: Your past academic records can influence the underwriting decision. A consistent academic record with no backs and first division in all exams demonstrates dedication. It increases the likelihood of successful course completion and future employment, which will result in a successful loan sanction
  2. Course and Institution Eligibility: Underwriters check whether your chosen course and institution meet the lender’s approved criteria. Programs with pro-employment prospects from reputable institutions are more favourable, as they enhance your ability to get a job after the course and repay the loan.

How Banks Verify the Income and Employment Details During Underwriting

Financial institutions such as banks are required to verify the employment details of the co-signer during the underwriting process. If the co-signer is a working professional who works for a company, then they will call or visit the company to confirm your employment. They will also demand your salary slips and bank statements for further verification. If a co-borrower is an informal job worker or a business owner, then their bank statements will be used to decide whether their income is sufficient or not. The verification of the income source and employment details of the co-signer is crucial for student loans without collateral.

Debt-to-Income (DTI) Ratio in Underwriting

The Debt-to-income (DTI) Ratio plays an important role in determining whether your student loan application will pass the underwriting process or not. The DTI ratio determines whether the co-signer in the education loan is in a condition to repay the loan if the student can not pay it off after completion of their course. To determine that banks check the credit report of the co-borrower and find out how many loans or credit cards they have now and had in the past, they also check for how many loan inquiries they had on their PAN. In addition, they check whether the income of the co-signer is sufficient to pay the current loans and future loans. After considering all these things, the underwriter determines the DTI Ratio, which should be 30% or lower to make you eligible for a student loan.

How Does Underwriting Work in Instant Education Loans

Although the underwriting process for an education loan is typically lengthy and takes several days to complete, many financial institutions offer instant education loans. This raises the question: how do banks provide instant student loans when the underwriting process takes days?

Instant student loans are typically processed within 24 hours, but banks don’t have sufficient time to assess all risk factors in such a short period thoroughly. To address this, financial institutions have developed a neat little trick to evaluate loan applications before offering education loans. If you have an excellent credit history and a strong CIBIL score, banks can accelerate the underwriting process and offer you an instant education loan. This is why instant loans aren’t available to all students; only those with a solid credit history are eligible.

Because these loans go through a quick underwriting process, unlike traditional education loans that involve more extensive scrutiny and take longer, banks usually don’t offer large amounts as instant loans for education. Therefore, if you have an upcoming educational expense that requires a smaller amount of money, opting for an instant student loan can be a convenient solution.

How to Ensure Your Education Loan Application Passes the Underwriting Process

Applicants do not have any say in the underwriting process of any bank or NBFC. But they can prepare their loan application in a way that it is difficult for the underwriter to reject it. Below are some of the key points that you need to consider when applying for a student loan. 

  • Do not submit an incomplete loan application.
  • Make sure that your collateral is of more value than the loan amount.
  • Never ask for an unreasonable amount for an education loan. You should be able to show how you will spend the amount.
  • Your co-signer should have a good credit history and should be earning well.
  • Ensure that you upload all the required documents during the education loan application process
  • The applicant’s academic performance should be consistent and show that they are motivated to study and will get a job after graduation.

Key Differences Between Underwriting Process of Government vs Private Financial Institutions

Private Financial Institutions Underwriting Process Government Financial Institutions Underwriting Process
Focus is given to the overall financial growth of the company. Focus is given to providing opportunities to students to pursue higher education, even at the cost of small losses. 
The loan is declined if there is no co-borrower for an unsecured loan. Usually, no co-signer is required for loans.
A loan is not sanctioned without a valuable asset as collateral Students do not need any collateral for the underwriting process
Interest rates are usually higher after the underwriting process Interest rates are minimal and sometimes waived for lower-income students. 

Also Read – Top Education Loan Subsidy Schemes in India

Conclusion

The education loan underwriting process is complex and differs from one bank to another. We have provided a general understanding of how this process works, which will prove detrimental for students facing multiple education loan rejections. You can understand how the underwriting process works and then have your countermeasures ready so that your loan application is approved as soon as possible.

FAQs

What is the meaning of loan underwriting?

Loan underwriting is a process conducted by lenders to evaluate how risky it is to extend an education loan to a particular candidate.

How long does underwriting take?

The underwriting process for an education loan takes about 2-3 weeks to complete. However, the time it takes to complete the process varies from one bank to another.

What is collateral in underwriting?

In the underwriting process, collateral refers to an asset that the borrower pledges to the lender as security for the loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral to recover the outstanding amount. The collateral's value relative to the loan amount is a crucial deciding factor in the underwriting process.

What are the 5 Cs of underwriting?

Lenders evaluate loan applications using the 5 Cs: Character (your credit history), Capacity, Capital, Conditions, and Collateral.

Can fake documents affect an education loan underwriting process?

Fake documents are typically detected during the underwriting process of an education loan. However, if an application with fraudulent documents somehow passes this scrutiny and is discovered later, it will lead to legal actions and the immediate termination of funds.

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