Complete Guide to Study Abroad Education Loans
Studying abroad may seem like an unattainable dream for many Indian students due to financial constraints. However, the countless opportunities it offers should motivate you to explore the possibility of studying abroad. We believe that financial limitations should never hinder a student’s potential to explore the world of education. Contrary to popular belief, there are alternatives to self-funding for studying overseas, such as scholarships, grants, and student loans. Studying abroad can unlock a world of opportunities if you are willing to take the leap.
In this blog, we will explore the world of study abroad educational loans. We’ll cover eligibility criteria, application processes, repayment options, and important considerations. By understanding the available financial assistance that’s out there, you can unlock your true potential and embark on an enriching educational journey abroad.
What is a Study Abroad Education Loan?
A Study Abroad Education Loan is a financial resource designed to support students in financing their education abroad. These loans, obtained from financial institutions, cater to a range of expenses such as tuition fees, living costs, travel expenses, and other related expenditures. By opting for an education loan, students can confidently transcend their financial limitations and pursue their educational dreams.
The perks of securing an education loan are aplenty. Firstly, it provides the much-needed funds to cover substantial study abroad expenses. Moreover, these loans often come with competitive interest rates and flexible repayment options, making it manageable for students to pay them back after completing their education. This allows students to manage their finances effectively, by alleviating the burden of financial concerns, students can wholeheartedly focus on their studies, unencumbered by monetary constraints.
Benefits of Study Abroad Educational Loan
Education Loans for students come with a lot of benefits:
- Educational loans give students opportunities to pursue their preferred courses in prestigious universities abroad, irrespective of their financial status.
- Lenders provide flexible repayment options, including moratorium periods, which provide a grace period after graduation before loan repayment begins.
- Educational loans usually offer lower interest rates compared to other types of loans, making them more affordable for students.
- Successfully repaying educational loans can help students create a good CIBIL score, which will help them in their future financial endeavours.
- You can claim a tax deduction for the interest paid on an education loan under Section 80E of the Income Tax Act, 1961. This means that the interest amount paid during a financial year can be reduced from your taxable income.
- The new Tax Collection at Source (TCS) rate for education loans is 0.5%, while it is 20% for self-funding. These rates apply to transactions above Rs. 7 lakhs. This means that taking an education loan will be more beneficial for you as it will result in lower tax payments than self-funding.
Understanding Key Terminologies
Before we can dive into explaining to you the education loan eligibility and requirements, it is essential to know the following terms:
- Co-applicant: A person who applies for the loan along with the student and shares the responsibility of repaying the loan. Usually, parents or siblings are co-applicants for an education loan.
- Collateral: An asset or property that is pledged as a security for the loan. If the borrower fails to repay the loan, the lender can take possession of the collateral and sell it to recover the loan amount.
- Guarantor: A person who agrees to repay the loan in case the borrower defaults on the loan.
- Moratorium period: The period during which the borrower does not have to pay any interest on the loan.
- Repayment tenure: The period over which the borrower has to repay the loan with interest.
- Interest rate: The percentage of interest charged on the loan amount per annum.
- Processing Fee: The fee the lender charges for processing the loan application and disbursing the loan amount.
- Prepayment penalty: The fee charged by the lender for repaying the loan before the end of the repayment tenure.
Education Loan Eligibility and Requirements
To be eligible for an educational loan in India students generally need to be between 18 and 35 years of age. However, the age requirements may vary among different lenders, so it’s important to check with the specific institution or bank offering the loan.
Most lenders require students to have a strong academic background, with a minimum score in qualifying exams such as the GRE, GMAT, or SAT. Additionally, students must have secured admission to a recognized foreign university or institution.
Co-applicant or Collateral
Many educational loans in India require a co-applicant, usually a parent or guardian, who acts as a guarantor for the loan. The co-applicant’s income and creditworthiness are considered during the loan approval process. Alternatively, some loans may require collateral, such as property or fixed deposits, as security against the loan amount.
Lenders assess the student’s repayment capacity based on factors such as the course selected, employment prospects after graduation, and the potential income the student may earn in the future. This evaluation helps determine the loan amount that can be sanctioned.
Loan Amount and Expenses Covered
The loan amount offered by lenders varies depending on factors like the course duration, country of study, and the financial requirements of the student. Educational loans typically cover tuition fees, accommodation charges, travel expenses, examination fees, and other related costs.
Types of Educational Loans
Secured educational loans require collateral as security. Some common types of secured loans include:
- Loans against Property
Students or their parents can pledge property as collateral to secure an educational loan. The loan amount sanctioned is usually a percentage of the property’s value.
- Loans against Fixed Deposits
If a student or their family holds a fixed deposit with a bank, it can be used as collateral to obtain an educational loan. The loan amount may range from 70% to 90% of the fixed deposit value.
- Loans against Life Insurance Policies
Life insurance policies with a surrender value can be used as collateral for an educational loan. The loan amount is typically a percentage of the policy’s surrender value.
Dollar vs Rupee Loans
INR Loan: This is a loan that is borrowed and repaid in Indian rupees (INR). The interest rate and EMI are fixed in INR. However, it’s important to note that this type of loan comes with the risk of currency fluctuations. If the INR depreciates against the USD, it could increase the cost of repayment. Therefore, it’s important to carefully consider the potential risks before opting for this type of loan.
USD Loan: When you borrow a loan in US dollars (USD) and repay it in the same currency, the interest rate and EMI remain fixed in USD. This type of loan protects you from the risk of currency fluctuations. If the INR appreciates against the USD, the cost of repayment decreases, saving you money.
Unsecured educational loans are collateral free education loans. However, they may have slightly higher interest rates compared to secured loans. Some common types of unsecured loans include:
- Government-Backed Loans
The Indian government offers various schemes like the Central Scheme to provide Interest Subsidy (CSIS) to support economically weaker sections of society in obtaining educational loans at lower interest rates.
- Private Bank Loans
Private banks and financial institutions offer educational loans without collateral. These loans are granted based on the student’s academic record, admission to a recognized institution, and the co-applicant’s creditworthiness.
- Non-Banking Financial Company (NBFC) Loans
NBFCs provide educational loans to students without the need for collateral. These loans often have slightly higher interest rates than government-backed schemes or bank loans.
Step by Step Application Process
Applying for a study abroad education loan involves the following steps:
- Research and planning: Begin researching the available loan options well in advance and create a plan that includes the estimated costs of education, living expenses, and other related expenses.
- Choose a lender: Compare the offerings of different banks and financial institutions, considering factors such as interest rates, loan terms, repayment options, and customer service.
- Gather documents: Prepare the necessary documents, including proof of admission, academic records, income certificates, bank statements, identity proof, and collateral documents, if applicable.
- Submit the application: Complete the application form and submit it along with the required documents to the chosen lender.
- Loan approval and disbursement: After the application is reviewed and approved, the loan amount will be disbursed directly to the educational institution or the student’s account as per the agreed-upon terms.
Important Considerations When Taking Educational Loan
Several factors need to be taken into account when choosing a study abroad education loan:
- Compare the interest rates and processing fees offered by different lenders to find the most favourable terms.
- Understand the maximum loan limit and the margin amount that needs to be contributed by the borrower. The margin requirement can vary based on the loan amount and the type of course.
- Some lenders offer loan repayment protection or insurance plans, which provide coverage in case of unforeseen circumstances such as the death or disability of the borrower or co-applicant.
- Apart from academic qualifications and creditworthiness, factors like the reputation of the institution, course selection, and future employment prospects may influence loan approval decisions.
- Failure to repay the loan on time can lead to penalties, a negative impact on credit scores, and legal actions by the lender. It is crucial to prioritise loan repayment and seek assistance if facing financial difficulties.
Tips for Managing Education Loans
Effectively managing study abroad education loans can ensure a smooth repayment process and minimise financial stress:
- Create a detailed budget that includes all expenses, both during the study period and post-graduation. Stick to the budget to avoid unnecessary financial strain.
- Explore part-time job opportunities in the host country to supplement income and cover living expenses.
- Continuously search for scholarships and grants to reduce the loan amount and ease the financial burden.
- Consult with education loan counsellors who can provide valuable advice and assist in getting you an education loan.
- Borrow only the required amount and repay the loan diligently to avoid long-term financial implications.
What to Do if Your Education Loan Gets Rejected
Education loans can be a great way to finance your study abroad experience. However, there is a possibility that your loan application may be rejected, which can be discouraging. But do not worry, as it does not mean the end of your study abroad dream. Here are some steps you can take if your loan application is rejected:
- Understanding the Reasons: The first and most crucial step is understanding why your loan application was rejected. Lenders usually provide reasons for rejection. It could be due to insufficient credit history, a low credit score, inadequate collateral, or other factors. Knowing the specific reasons will help you address the issue.
- Review Your Application: Carefully review your loan application. Ensure all the documents and information are current, accurate and complete. Sometimes, minor errors can lead to rejection.
- Explore Co-Singer Options: If you have a close family member or friend with a strong credit history, consider asking them to co-sign the loan. This can improve your chances of loan approval.
- Explore Alternative Funding Sources: While education loans are a common choice, there are other funding options to consider, such as scholarships, grants, part-time jobs or sponsorships. This can help you reduce your financial burden.
- Consider Different Lenders: Don’t lose hope if one lender rejects your application. Different financial institutions have varying criteria for approval. You might be able to find another lender willing to grant you the loan.
Pursuing higher education abroad can be a life-changing experience for Indian students. Education loans for study abroad offer a practical solution to finance this dream, but understanding the various aspects of study abroad education loans is crucial for making informed decisions. By exploring the types of loans available, eligibility criteria, application process, repayment options, and important considerations, students can navigate the loan process effectively and embark on their educational journey with confidence. With careful planning, responsible borrowing, and timely repayments, study abroad education loans can open doors to a bright future filled with exciting opportunities.
Don’t let the overwhelming prospect of taking an education loan hold you back. We understand that for many students, this may be their first time considering borrowing such a significant amount of money. But worry not, our team of experts is here to guide you every step of the way. Connect with our education loan experts today and discover the endless possibilities that lie ahead. Let us show you just how limitless you can be.