Key Things To Consider When Choosing An Overseas Education Loan

Pursuing higher education overseas can be a tremendous financial expenditure, and selecting the right education loan is crucial for students who wish to plan their expenditures in a better manner. As different lenders offer different terms, students must carefully examine crucial details such as eligibility, repayment terms, and expense incurred before signing an agreement.

Eligibility and Documents Required

The eligibility for overseas education loans differs according to the lender, the type of course studied, and the applicant's financial condition. A majority of lenders look for a student who is an adult and has secured admission at a well-recognised foreign university. Besides that, courses for undergraduate, postgraduate, and doctoral degrees, basically the types of programs you are opting for also matter for the banks to disburse loans.

Aayush Nagpal, business head and founding team of GradRight, says, "Choice of the course is linked to both education loan terms as well as post-study visa opportunities. STEM courses are preferred for loans and visas both. Banks look at university ranking to set their pricing and lending norms—based on their approved list of universities. Likewise, for destination countries like the US, loan rates are better and there is higher flexibility to waive off financial cosigner or collateral whereas Malta or Russia may not enjoy the same terms".

Banks and financial institutions typically take into account the student's academic record, the institution's ranking, and the career opportunities of the chosen program. Some lenders have exclusions for diploma programs, language courses, or distance learning.

Apart from eligibility criteria, students will also have to prepare a list of documents required while applying for a loan. These typically include:

• Admission letter from a foreign university

• Fee structure with the details provided by the university

• Academic documents such as mark sheets and certificates

• Identification and residence proof

• Income proof of co-borrower (parents or guardians)

• Collateral documents (in the case of secured loans)

• Visa approval and original passport

Differences Between Banks and NBFCs

Both banks and non-banking financial corporations (NBFCs) offer foreign education loans, but both are different with respect to terms of lending, flexibility, and costs.

Loan Amount: Banks sometimes lend up to 100 per cent of the total expense of foreign studies. It may be the tuition fee, living expenses, travel, and insurance. Public sector banks generally may give loans ranging from 20 lahks to 50 lakh for premier institutions, and a few even lend up to 3 crore for top-of-the-line universities. Some banks also offer collateral-free unsecured loans ranging up to Rs 1 crore in some cases. 

NBFCs are also flexible in these terms and loan amounts and will finance up to 100 per cent of the total educational cost, even without collateral for minor amounts at times. However, NBFCs charge more interest for such flexibility.

Interest Rates: The banks usually levy lower interest rates, ranging between 8 and 11 per cent for secured loans. Unsecured loans without collateral may be charged slightly higher than 9.50 to 13 per cent. Interest rate rebates are also given by banks to female students or for admission into accredited universities.

NBFCs usually charge higher interest rates, between 11 to 15 per cent, especially for unsecured loans. Although their interest rates appear to be higher, NBFCs also offer quicker loan sanctioning and flexible repayment terms.

Moratorium Period: A moratorium period, i.e., a time frame for no principal repayment is offered both by banks as well as by NBFCs. It runs as a standard term for the tenure of the course plus 6 months to a year after that. Some NBFCs extend more moratorium terms depending upon the course and history of the company.

Nagpal also mentions, "A full moratorium period gives students the breather to concentrate on their academics fully and pay once they graduate. In essence, the moratorium period is designed to provide temporary financial relief and flexibility to students during their education and transition into the workforce. But one must note that it increases the total cost of loan due to interest capitalisation and compounding".

Repayment Window: Banks provide a repayment period of 5 to 8 years, while in certain cases, up to 15 years for higher amounts of loans. NBFCs provide shorter repayment tenures, i.e., five to ten years, but payment flexibility can be provided to a student based on his or her expected income post-graduation.

Processing Fees and Other Costs: Banks normally charge a processing fee of between 0.5 and 2 per cent of the loan amount. But some banks also charge flat fees up to Rs 10,000 as processing fees. NBFCs also charge similarly when it comes to processing fees, sometimes up to 2 per cent, particularly for unsecured loans. There are also prepayment charges or early closure fees charged by some lenders, which students should keep in mind when making a choice.

Mayuresh Kini, principal officer at Zinc Financial Advisors, says, "When choosing education loans, the students also need to consider the cost of borrowing—processing fee, forex conversion fee, and underwriting fee—versus rates of interest. These cannot be avoided, or huge payment responsibilities can follow. The lenders and terms should be compared and analysed before selecting the loans to facilitate sound financial planning".

He also emphasised various other aspects of loan approval, saying, "Availability of loans and interest is provided by lenders depending on a student's study location, university, and course in consideration of job potential. Such courses that have high job opportunities in stable economies are low in risk, and such courses are availed with favourable loan facilities by lenders. Visa policies, labour market demand, and geopolitical instability influence employment after graduation, decreasing the fundability of some courses and study destinations. Parents have to make an informed decision based on such factors so as to pick education prospects that fall under their affordability".

Factors to Consider Before Choosing a Loan

Picking the appropriate education loan involves more than comparing interest rates. Students would do well to consider a number of other factors to ensure that the loan complies with their budget and professional aspirations.

1. Total Cost of the Loan: You would generally look for a low interest rate, but you should also take into account processing charges, forex charges, and charges for late payments. Calculating the total repayment amount over the tenure of the loan will help you determine the real cost of borrowing.

2. Collateral Requirements: Secured loans enjoy preferential interest but with the need for assets such as property, fixed deposits, or insurance policies as collateral. Unsecured loans are convenient but with higher interest and more heavy repayment conditions.

3. Course and University Ranking: Some lenders offer preferential interest for students studying courses at top-ranked universities or undertaking high-demand courses. Choosing a renowned institution may improve loan conditions.

4. Exchange Rate Fluctuations: Since payments are typically in the domestic currency whereas expenditures in foreign countries would be in the foreign currency, the students must consider potential fluctuations in the exchange rate while projecting future levels of repayment.

5. Co-borrower's Financial Standing: A co-borrower, mostly a guardian or parent, by many lenders' requirements, whose income profile will be an imperative consideration for approval of the loan. Whether or not the co-borrower can afford the repayment plan has to be determined.

Making an Informed Choice

Choosing a suitable overseas education loan involves a careful consideration of a number of factors. Though banks provide lower interest rates and longer repayment tenures, flexibility and faster approval are provided by NBFCs.

"Students go beyond just looking at interest rates in an education loan. One must add all upfront and post-loan disbursement costs as well - Processing fee (0.5 per cent to 5 per cent), property evaluation and legal charges (up to Rs 7,000 to 10,000), stamp duties could be upfront in nature while TCS, forex costs, prepayment charges, health insurance, travel insurance, loan insurance could be post disbursement costs", reminds Nagpal. 

By carefully researching their choices and being aware of important loan terms, students are able to make informed choices that help them meet their academic objectives without incurring undue financial burden upon graduation.