10 Factors to Consider Before you Apply for an Education Loan

Did you know that according to a survey 85 out of 90 Indian students are planning their further education overseas. Not only this, as reported by Public Sector Banks (PSBs), in the last 10 years, a total of 4,61,000 students availed of education loans for studying abroad. Clearly, studying abroad is a transformative experience that opens doors to a world of opportunities and personal growth. However, the cost of foreign education can be a significant barrier for many aspiring students. This is where abroad education loans come to the rescue.

Are you thinking about applying for an education loan to study abroad? To ensure that your loan application isn’t lost in the pool of uncountable applicants and give you a clear starting point. It is important to understand some crucial factors you should know about.

Interest rate

The interest rate is basically the cost of borrowing the money. It is the add-on percentage of money that a borrower must pay back on top of the principal amount borrowed for educational purposes. Depending upon your lender, the rate of interest on a study abroad education loan ranges from 8.85% to 16%.

How does a 1% difference in interest rate make a huge impact on EMI?

While a 1% difference in the interest rate does not seem significant, when you convert the rate into total interest to be paid over the repayment tenure using the GyanDhan’s EMI calculator, it is exorbitant. 

Case study: Let’s say, Rohit, a post-graduate student took an education loan of Rs 30 Lakh at 12%. His EMI was Rs, 43,566 and his total amount payable to the bank including the interest was Rs. 71,84,00. However, he transferred his loan to another bank with 10% interest rate, where his EMI became Rs 40,462. And his total amount payable became Rs. 63,12,000. Can you see the amount that Rohit will be saving. Can you imagine how much money you can save, even with a 2% lower interest rate?

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Processing fee

Processing fees refer to the charges or fees that a financial institution or lender may impose when you apply for and process your application for an education loan. This fee is typically non-refundable and is meant to cover the administrative costs associated with evaluating your loan application, verifying your eligibility, and processing the necessary paperwork. 
 

Lender	Processing fees
Public banks	Up to INR 10,000 + GST
Private banks	Nil or refundable
NBFCs	1%-2% of the total loan amount
International lenders	Up to 5% of loan amount

Loan amount in INR vs. USD

When it comes to choosing between a domestic lender and a foreign lender for study loans, the decision can be quite nuanced and depends on various factors. Let's break down the considerations:

Scenario 1: Both lenders offer the same interest rate

In this case, where both domestic and foreign lenders offer comparable interest rates, there's a compelling argument for choosing the domestic lender. Here's why:

• Currency exchange rate trends: Over the years, the exchange rate between the US dollar (USD) and the Indian rupee (INR) has been volatile. For instance, in 2012, USD 1 was equivalent to INR 45. By 2016, it had risen to INR 60, and today it's over INR 82. This trend suggests that the INR tends to depreciate against the USD over time.
• Repayment advantage: If you earn in dollars and borrow from a domestic lender in INR, it becomes more manageable and beneficial to repay the loan in rupees. As the INR depreciates, the amount you owe in USD decreases. Therefore, choosing a domestic lender with a comparable interest rate can be a financially sound decision.

Scenario 2: Both lenders offer different interest rates

In this scenario, where the foreign lender offers a lower interest rate compared to the domestic lender, it might seem like an obvious choice to opt for the foreign loan. However, it's essential to consider the long-term impact of currency exchange rates:

• Long-term considerations: Fast forward to the year when you have to repay the loan. If you're earning in USD, and the rupee has continued to depreciate, you'll have to repay the foreign lender the entire loan amount in USD. However, for the domestic loan, you still only need to pay back the principal amount in INR, which, due to the rupee's further depreciation, may actually be less in terms of USD.  
• Hidden cost of exchange rate fluctuations: In essence, the depreciation of the rupee against the dollar can erode the initial interest rate advantage offered by the foreign lender. Even with a seemingly lower interest rate, the foreign loan may turn out to be more expensive when you consider the currency exchange fluctuations.

To make a more straightforward comparison, you can convert the interest rate of the foreign loan into INR. In the example given, a 9% interest rate in USD could be equivalent to a 14% interest rate in INR due to the currency exchange rate trends.

Fixed interest rate vs. floating interest rate

In most cases, education loans from banks have a floating rate of interest as they are linked to the bank’s MCLR (Marginal Cost of Funds based Lending Rate) plus 1.5-2%. Whereas, the interest rate of NBFCs mainly depends on the operating profit of the company. Therefore, the interest rate tends to change according to the prevailing market conditions in India which directly impacts the operating profit of NBFCs. Whereas in the case of banks, the increment is either NIL or less than 0.25%. Always consider the impact of the floating rate on your EMI before you choose a loan. 

Prepayment penalty

A lot of students decide to begin squaring off their loan before the scheduled repayment time. The reason is by repaying now, they tend to save on future interest amounts. While the logic is sound, you should consider if the lender charges a prepayment penalty.

The penalty can be free of cost or a 2% to 4% fee when you pay to the lender before the tenure. Knowing the prepayment penalties at the beginning of a loan process helps you plan in advance and choose an education loan scheme that fits you.

Did you know? That banks do not charge any pre-payment penalty after 6 months of the loan is disbursed. 

Tax benefits

When it comes to education loans, many students are unaware of the tax benefits and exemptions available to them. One of them is section 80E of the Income Tax Act that provides significant relief by allowing individuals to claim deductions on the interest paid towards education loan repayment. 

The deduction under Section 80E Chapter vi(a) of the Income Tax Act allows for the total interest paid on education loan EMIs during the financial year. There is no maximum limit on the tax exemption amount on education loans. To claim the deduction, you must obtain a certificate from your bank that clearly separates the principal and interest portions of the loan payment. Only the interest paid is eligible for tax benefits, while there is no tax benefit for the principal repayment.

Note: Tax benefits are only available for education loans secured from banks.

Repayment tenure

Repaying a loan is a long-term commitment, lasting up to a decade and a half. Ponder over two elements before selecting the time period suitable for you:

• The total interest - For longer tenures, the total interest repayment is higher. 
• Your expected income - The EMI of the study loan should not exceed what you can comfortably repay in the future.

However, we at GyanDhan strongly recommend calculating your total interest and difference in EMIs per month before you select your repayment tenure. 

Here’s a simple example: If you take a loan of INR 20 Lakh @ 11% for 10 years, your total interest would be INR 19,42,412 and monthly EMI would be INR 32,853. However, if you select your repayment tenure as 15 years, an addition of 5 years would lead to an interest payment of INR 28,79,413 with monthly EMIs of INR 27,108. The whopping difference of INR 9,37,001 over an additional 5 years in payable interest and a tiny difference of INR 5,745 per month in EMI payment prove that shorter repayment tenures are a wiser financial decision.

Pre / Post visa disbursement

Many countries have varying requirements for the disbursement of education loans, with some necessitating pre-visa disbursement and others requiring post-visa disbursement of the loan funds. Pre-visa disbursement loans are offered to students as a means to secure their enrollment by making an initial payment for tuition fees, such as a deposit or the first-semester tuition, to the university or college before obtaining their visa. Once the student has secured admission to the institution, they can then use the Pre-Visa disbursement loan to apply for their visa.

On the other hand, post-visa disbursement loans are provided to students once they have received approval for their e-Visa or have their actual visa stamped in their passport. In this case, students must provide a copy of their visa to the loan officer, who will then disburse the funds for various expenses, including tuition fees, living expenses, Overseas Student Health Cover (OSHC), airfare, laptop, and visa fees. It's essential to inquire with the bank about whether they offer pre- or post-visa disbursement before submitting a proposal for an overseas education loan, as only select banks provide pre-visa disbursement. International lenders typically offer post-visa disbursement once students have arrived at their study abroad destination.

Must Read: Issues to expect after education loan sanction

Estimate your future earnings 

Students who are considering financing their education through loans should thoroughly examine the placement record and the average salaries offered by the institutions they are eligible for. This will enable them to make a rough estimate of their future monthly income, allowing them to plan their Equated Monthly Installments (EMIs) and the duration of their loans accordingly. Borrowers should avoid an aggressive repayment schedule as any EMI default caused by unemployment or lower than expected pay will adversely impact their credit score and future loan eligibility. 

Remittance to university or student account

Students should check the process of remittance of the loan amount with the bank whether they are going to transfer the funds to the student / co-applicant account or to the university account. 

Banks disburse the tuition fees directly to the university, while the living expenses are transferred in the Forex card or in accordance with visa regulations. Non-Banking Financial Companies (NBFCs), disburse the entire loan amount, either in the student's or the parent's account. Whereas, international lenders, on the other hand, typically send tuition fees and on-campus accommodation charges to the university on a semester-by-semester basis upon receipt of the invoice.

GyanDhan is a game-changer when it comes to simplifying the education loan process. With our user-friendly platform and partnership with leading banks and NBFCs, we streamline the entire loan application process for students. We compare multiple loan options from various banks and non-banking financial companies, making it effortless to find the most competitive interest rates and favorable terms. Moreover, our dedicated team of experts provides personalized guidance, helping students navigate the complexities of loan documentation and ensuring a smooth application process. 

How to apply for an education loan through GyanDhan?

The process to apply for an abroad education loan should always start from exploring and comparing different lenders and their products. Borrowers win half the battle as GyanDhan evaluates your profile and selects the best lender for them. To apply for an abroad education loan through GyanDhan, you need to follow five simple steps.

Step 1: Check your loan eligibility.

Step 2: Expert education loan counselor will evaluate your profile.

Step 3: Team GyanDhan will either arrange a doorstep pickup for your documents or you will receive a customized checklist to upload.

Step 4: Once the documents are uploaded, GyanDhan will proceed with the rest of the formalities.

Step 5: The bank will disburse the amount as per schedule.

Securing an education loan for studying abroad can be a complex process, but with careful planning and expert advice, it is entirely achievable. By understanding your financial needs, eligibility criteria, and the terms and conditions, the GyanDhan team suggests the best loan program for you. Not only this, we provide you with a customized document list that ensures a complete file. 

By offering a one-stop solution for education financing, GyanDhan empowers students to focus on their academic pursuits while taking the stress out of securing funds for their education. To start your abroad education journey, check your loan eligibility.

Also read:

• Education loans in INR vs USD
• Factors to Consider When Applying for an Education Loan
• Education Loan Process for Abroad Studies
• Student Education Loan Details for Indian Students
• Documents Required for Education Loan
• Moratorium Period In Education Loan
• Education Loan EMI Calculator
• Education Loan Interest Rate

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