Studying abroad? How to choose the right lender type for an education loan

There are several other factors to consider apart from the interest rate, such as moratorium, collateral and quantum of assistance

While Covid-19 may have disrupted lives in general, it doesn't seem to have stopped those aspiring to pursue studies abroad. The United States issued the highest ever number of student visas, at over 55,000 in India this year, according to media reports. Surabh Jhalaria, head of education and SME lending, InCred Finance says, "July, August and September are actually the busiest months for students going abroad. Loan availing happens during these months. Fortunately, with the second Covid-19 wave ending quickly, visa issuing began and with vaccination validity being sorted, we saw a record number of applications go through." 

An education loan for overseas studies can be availed from banks, non-banking finance companies (NBFCs) and Fintech lenders. While there is no dearth of options, availing it is difficult. Sahil Arora, senior director, Paisabazaar.com says, "The economic disruption caused by the pandemic has hurt the incomes and livelihoods of many. Hence, banks and NBFCs have become more conservative in their loan evaluation process, especially for those belonging to the sub-prime category, to reduce chances of future NPAs." 

Other Challenges: Apart from Covid-related difficulties, there are other challenges too, while getting a loan. Adhil Shetty, chief executive officer, Bankbazaar says, "Lenders do not finance all educational courses. Most banks typically offer educational loans for long-term job-oriented professional and technical courses at the undergraduate and postgraduate levels offered by reputed universities." Diploma courses like aeronautical, pilot training, and shipping also fall into the approved list, provided these are recognised by competent regulatory bodies in India or abroad for employment. Shetty adds, "If you're considering an off-beat course or a course from a university/college not on the lender’s approved list, you may not get an education loan in India to fund it."

Most lenders insist on collateral for loans above Rs 7.5 lakh. If the student does not have property or investments that can cover the cost of the loan, then the loan may not get sanctioned. Shetty says the lender may also keep a margin of 5-20 per cent and may not sanction the entire amount. This could be problematic, as the loan is usually expected to cover not just fees but also living and travel expenses, and supplies such as laptops. A smaller loan could affect the ability of the student to take the course.

Arora adds, "Availing an education loan may not be difficult for those getting admitted in reputed institutions, having income stability, adequate repayment capacity and sufficient third-party collateral."

Options to choose from

Banks: Banks, especially public sector ones, have always been top lenders of education loans.

Pros: V Swaminathan, CEO, Andromeda and Apnapaisa says, "Cost of raising funds is lower for banks; therefore, banks typically offer loans at lower rate of interest." The current interest starts from 7.15 per cent and its repayment qualifies for tax deduction under Section 80E. You can avail this deduction for eight years after the start of the repayment of the interest component. 

Cons: Typically, banks will offer lower loan amounts, though some do offer enormous amounts, even up to Rs 1.5 crore. However, banks, especially public sector ones, are slower in processing loan applications.

Advice: It's still better to check with your bank. Swaminathan says, "You should go for a bank if you have an existing relationship with it."

NBFCs: Most non-deposit taking NBFCs borrow from banks for onward lending and then add to their margin. Hence their rates of interest are higher.

Pros: Education loans availed from approved charitable institutions and NBFCs specified by the Central government would also qualify for Section 80E deduction. Swaminathan says, "NBFCs typically process the loan application faster and take fewer days to give an approval." While a bank is a little rigid with its loan approval process, an NBFC can be a little more flexible, offering a wider range of more services and add-ons for students wanting to study abroad. Jhalaria says, "NBFCs also offer more flexible and customised payment schedules than banks, which have a more rigid structure."

Cons: NBFC education loan can be expensive, with interest rates ranging between 11-13 per cent depending upon the candidate's profile, eligibility and other criteria. The rate can even go up to 15 per cent for certain candidates.

Advice: Make sure you understand the other terms and conditions in the contract, hidden collateral, etc before signing the application and acceptance letter.

Moratorium Option: Banks and many NBFCs offer moratorium on the education loan repayment, during which the borrowers needn't pay EMIs. This period usually goes up to a year after the completion of the education course or six months after getting a job, whichever is earlier. Arora says, "The moratorium is aimed at providing students some time to find a job and then start repaying their EMIs from their own income, reducing the financial burden on their parents."  

Traditionally, banks sanction loans only after admission confirmation. However, certain NBFCs offer pre-approved education loans, even before you apply to universities.

FinTech: Sometimes getting an education loan for overseas studies from Indian lenders like banks and NBFCs can be difficult, due to various terms and conditions. In such cases, one can look at a fintech lender.

Pros: Fintechs are more technology driven and the entire application processing is online. The terms are more flexible as well.

Cons: Fintechs charge a higher interest because of higher cost of funding, with rates ranging from 12-16 per cent or even more.

Advice: Use this option if you have a tight deadline. Swaminathan says, "Go for this if time is a big constraint." Education loans from fintechs are useful for those who can't borrow from banks due to poor credit reports or lack of credit history.  

Global Lenders: Other players in this space include global lenders such as Prodigy and Mpower Finance. Interest rates for Indian students usually range from 9-14 per cent. Some educational institutions have tie-ups with them. Since these lenders offer massive loans with zero collateral or a co-borrower, they set the bar high in terms of whom they lend to. Due to the high loan amount, everything hinges on the student’s ability to get a well-paying job in that country. However, if a student returns to India and takes up a job here, he could face a double whammy. 

Things to keep in mind: First check out whether the university/institute has any tie-ups with banks or NBFCs for education loan. Arora says, "Such tie-ups usually offer faster loan processing and may also offer lower interest rates. The borrowers should also remember that they will continue to incur interest costs during the moratorium period." Hence, they should try to at least service the interest component during the moratorium period. Many lenders also provide interest rate concession to those servicing the interest component during the moratorium period.

Arora adds, "Lenders consider the credit scores of the borrower during loan evaluation. So start working toward building a credit score of 750 and above." High score means better terms and lower rates. As lenders may ask for a third-party guarantee and collateral for availing loans exceeding their set threshold amounts, borrowers should start working towards arranging the collateral and third-party guarantor.

Table: A snapshot of education loans for studies abroad 

Lender	Interest rate (%)	Loan amount (Rs)	Processing fee	Margin requirement
Bank of India	7.55-9.35	Up to 80 lakh	Rs 5,000 (Refundable once loan is availed)	Up to 4 Lakh: NIL;

Above 4 Lakh: Up to 15%

Bank of Baroda 7.75-8.90 Up to Rs 1.5 crore 1% of loan amount (max: Rs 10,000) (refundable on first disbursement) Up to 4 Lakh: NIL; Above 4 Lakh: Up to 10%

Punjab & Sind Bank

8.60-9.10 No limit Rs 2,000 (Refundable after full availment of loan) Up to 4 Lakh: NIL, Above 4 Lakh: Up to 15% Punjab National Bank 8.80–9.55 No limit 1% of loan amount  (min: Rs 10,000) (refundable after first disbursement)  Up to 4 Lakh: NIL; Above 4 Lakh: Up to 15%

Union Bank of India

8.40-10.05 Up to 30 lakh NIL Up to 4 Lakh: NIL; Above 4 Lakh : Up to 15% Federal Bank 10.05 onwards Up to 20 lakh 0.25% of loan amount (Up to Rs 2,500) Up to 4 Lakh: NIL; Above 4 Lakh : Up to 15% HDFC Credila 11.80 + Spread 1 lakh onwards 1-2% of loan amount Up to 100% funding

Avanse

12.65 + spread 1 lakh onwards 1-2% of loan amount Up to 100% funding Axis Bank 13.70-15.20 50,000-75 lakh Loan up to Rs 20 lakh: Rs 15,000 (refundable fee) Loan above Rs 20 lakh: 0.75% of differential loan amount above 20 lakh Up to 4 Lakh: NIL; Above 4 Lakh : Up to 15%

Rates as on September 3, 2021; Source: Paisabazaar.com