Consider interest rate, collateral, cosigner terms when selecting lender

The number of Indian students pursuing higher education abroad doubled between 2019-20 and 2023-24, according to a recent report by CRISIL Ratings.

The same report adds that education loans for overseas studies are a rapidly expanding segment for non-banking financial companies (NBFCs), whose education loan assets under management (AUM) grew by over 80 per cent and 70 per cent in financial year 2023 (FY23) and FY24 respectively. NBFCs’ total education loan AUM stood at around Rs 43,000 crore on March 31, 2024 and is expected to grow by 40-45 per cent in the current financial year.

Many colleges in popular study destinations for Indian students, such as the US, UK, Europe, Canada and Australia, have hiked tuition fees. “With tuition fees for international students rising, education loans have become critical for bridging the gap between savings, scholarship, and full cost,” says Vibha Kagzi, founder and chief executive officer (CEO), ReachIvy.com.

Indian students typically approach banks, NBFCs, and a few international lenders for foreign education loans.

 

Key decision-making criteria

Loan amount: The loan amount must cover tuition fees, books, living expenses, and other costs. At the same time, overborrowing should be avoided. Loan amounts offered by lenders vary from Rs 4 lakh to over Rs 1.5 crore.

“Calculating the right loan amount is essential: shortfalls can cause financial strain, while excess borrowing leads to unnecessary debt,” says Nilanjan Chattoraj, head-credit & product, education loans, InCred Finance.

Interest rates: Both fixed and floating rate loans are available. Various factors determine the loan rate: the rate at which the bank lends to the NBFC, the student’s risk profile, the university’s ranking, and whether the loan is secured or unsecured. Rates typically range from 8 per cent to 15 per cent, and sometimes go even higher.

“Weigh the pros and cons of fixed and variable interest rate loans before deciding,” says Sonal Kapoor, global chief commercial officer, Prodigy Finance.

Loan tenure and moratorium period: Education loans have a maximum tenure of 15 years, including the moratorium period. “Once the student finishes the course, she gets six months to find a job before the repayment starts,” says Kapoor.

Kagzi suggests seeking flexible repayment or income-based options to ease financial pressure after graduation.

Collateral and co-signer: A co-signer and/or collateral is required for larger loans. Some lenders require both. Cash, immovable property, fixed deposits, mutual fund investments, and insurance policies can serve as collateral.

“Unlike banks that often require collateral, many NBFCs assess loan applications based on the student’s potential, course chosen, and the study location. This flexibility allows a broader range of students to access loans,” says Chattoraj.

Kagzi warns that the cosigner must understand her responsibility in case of a default.

 

Mistakes to avoid

Borrowers repaying loans in rupees should account for exchange rate volatility, which can increase the loan burden.

“Ensure that the lender offers favourable exchange rates and low fees for currency conversion at the payout stage,” says Kagzi.

Read the loan contract carefully. Also, pay attention to prepayment penalties, late fees, processing fees, and other additional charges.

Before finalising the loan, research the job market and the potential salary you can earn in your destination country. Ensure that it is adequate to cover your EMI obligations.