Borrowings | Student loans: Do the math first

Have a clear financial plan to fund your education including part-time jobs and scholarships. For those aspiring to study abroad, remember the impact of a falling rupee on your loan.

Borrowings | Student loans: Do the math first
Banks giving dollar-denominated loans do not fund every course or university.

As the academic year for higher education begins, many would be looking at an education loan to fund their studies. With rising interest rates, the cost of borrowing has risen and it is a double whammy for those going abroad for their higher studies because of the depreciation of the rupee against the dollar.

Students must first calculate the total cost of the programme of their choice such as course and exam fees, hostel, food, laboratory, etc., and then apply for an education loan based on their requirements. The maximum amount of loans may vary depending on the institution, education records, repayment capacity and the total income of the student’s family. Students taking admission in premium institutions and having a good academic record will likely get a larger loan.

The trend to go abroad for studies has been rising. Students need to keep in mind that as the rupee usually depreciates against the stronger foreign currency, with the passage of time and the tenure of the course, the expenses in rupee are likely to increase.

Collateral requirements

For an education loan up to Rs 4 lakh, no collateral is required and the interest rate does not exceed the Prime Lending Rates (PLR). For loans above Rs 4 lakh, the interest rate cannot exceed PLR plus 1%. Some banks also offer student loans up to Rs 7.5 lakh for higher studies without collateral. However, any loan above Rs 7.5 lakh may require collateral of minimum value equivalent to the loan amount and interest accumulation during the course and moratorium period.

Experts suggest that students must have a clear financial plan to fund their education, including part-time jobs and scholarships and should refrain from borrowing too much at an early stage. As education loans are disbursed in tranches based on when tuition fees become due for subsequent terms, one must check documentary requirements of the lender.

Dollar-denominated loans

Overseas lenders offer dollar-denominated loans to Indian students for studying abroad. Students must do a good amount of research before deciding between rupees/dollar loans. Adhil Shetty, CEO, Bankbazaar.com, says with a dollar-denominated loan, the costs may inflate over time due to forex rates. “However, if you are settling abroad and have the means to repay the loan, you can borrow from foreign institutions,” he says, and advises paying more than the minimum dues which will shield the borrower’s finances against forex fluctuation and allow for getting out of debt faster.

Banks giving dollar-denominated loans do not fund every course or university. Product features like amounts, repayments, rate of interest should be carefully understood. Nilanjan Chattoraj, head, Credit & Product- Education Loans, InCred, a non-banking financial company, says, “Students should consider the weakening rupee against the dollar. Repaying a dollar loan from India can thus become very challenging. Inversely, paying an Indian rupee loan from overseas is easier,” he says.

While borrowing from an overseas lender may have some benefits such as no co-borrowers, collateral and optically lower rate of interest than Indian rupee loans, the student may end up paying more for the student loan in foreign currency because of currency fluctuations. “The products are usually designed keeping home country students in mind. Other challenges like repaying in foreign currency even when one comes back to India can be challenging, both in terms of  process as well as costs,” says Prashant A Bhonsle, founder, Kuhoo Fintech.

While the education loan in dollars from an international institution may look attractive because of lower rates as compared to a rupee loan from a domestic institution, after the actual rate at which the borrower will pay is the sum of quoted interest rate and the annual depreciation of the rupee. Chaitali Dutta, a personal finance wellness expert and founder of AZUKE, says these loans do not carry a moratorium period and the EMI starts from the following month of disbursal. “A student could approach a lender for a loan in foreign currency only after exhausting all possibilities of a domestic education loan in rupee,” she cautions.

STUDYING ABROAD

— While taking an overseas loan may have some benefits, you may end up paying more due to currency fluctuations

— Repaying an Indian rupee loan from overseas is easier due to forex fluctuations

— Go for a loan in foreign currency only after exhausting all possibilities of a domestic education loan in rupees

— Banks giving dollar-denominated loans do not fund every course or university

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