Course, institute determine lender's willingness to offer an education loan

A co-borrower with a good credit score and adequate collateral can expedite approval

Sarthak Antal, 22, will pursue Masters in Electrical and Electronics Engineering from Purdue University in the United States (US). While the tuition fee for the two-year course is Rs 50 lakh, the living expenses will add upto another Rs 30 lakh. Antal has taken a loan for the entire Rs 80 lakh at an interest rate of 10.85 per cent from a private-sector bank. Reflecting on his experience, he says: “Having all the documents, a co-applicant with a good credit score, and the required collateral in place can speed up the sanction of a high-value loan.”

Rising costs, bigger loans 
 

The cost of foreign education has gone up considerably between 2019 and now. “The tuition fee has increased 4-5 per cent annually. The rupee has depreciated against the dollar. Before the pandemic, it used to trade at slightly above 70 and now it trades at 81-83. The cost of living has also gone up by 5-6 per cent annually,” says Amit Gainda, managing director & chief executive officer (CEO), Avanse Financial Services.
 

Costs have increased across courses in all the popular destinations. “Costs are up in the US, UK, Canada, etc. Canada, a low-cost destination earlier, has seen a significant increase on a lower base. This is hitting students from less affluent backgrounds,” says Neeraj Khanna, co-founder and director, Bengaluru-based Spark Career Mentors.
 

Tax collected at source (TCS) adds to parents’ cash flow woes. If you are remitting money taken on loan from a financial institution, then the TCS rate on the amount above Rs 7 lakh is 0.5 per cent. If the money being remitted is not out of a loan, the TCS rate (on amount above Rs 7 lakh) is 5 per cent. “When the student stays on-campus, it is easier to prove that living and other expenses are part of the cost of education. But if the student lives outside the campus, as many students do to reduce cost, it becomes difficult to prove that the living expenses are education-related,” says Khanna. In such a case, 
 

parents could end up paying 20 per cent TCS. Greater clarity in this regard is expected from the income-tax department soon.

Rising costs are forcing students to go for larger-sized loans. “The average ticket size of a loan for a student going overseas used to be Rs 20 lakh in 2019 (pre-pandemic) and is Rs 25 lakh now, an increase of 25 per cent,” says Gainda.

Who will lend to you?
 

Do the research to find out which bank or non-banking financial company (NBFC) will be willing to lend to you. “Both the educational institute and the course must be on the lender’s approved list for you to get this loan,” says Adhil Shetty, CEO, BankBazaar. Generally, it is easier to get a loan for a technical course with better employment prospects. A loan for an offbeat course like performing arts may prove difficult to get.
 

Says Gainda: “Select the country, university, college and course carefully. These will have a big bearing on your employability and hence your ability to service the loan.”
 

How much will you get?
 

The total cost of foreign education has several components: living expenses, travel expenses, books and equipment, and so on. Inflation and the rupee’s depreciation against the dollar also need to be considered. “Ensure that you borrow an amount that factors in all your needs,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers.
 

In most loans, the borrower will have to come up with some margin money — 10-20 per cent of the total cost.
 

Bank or NBFC?
 

Banks usually have a more stringent list of courses and institutions while NBFCs generally cover a larger number of courses and institutions. Banks are likely to take more time to complete the procedures and sanction the loan. NBFCs are likely to be swifter. “But there is a trade-off. A loan from a bank is usually cheaper than one from an NBFC,” says Shetty.
 

Have collateral and co-applicant ready
 

Compare the interest rates of the lenders who agree to lend to you. If you need a high-value loan of above Rs 5 lakh, in all probability you will have to provide some collateral.
 

In high-value loans, a co-applicant is also required. If the co-applicant’s credit score is below 750, getting a loan becomes more difficult.
 

Check the prepayment charge and also the moratorium — the period of time after completing the course when repayment begins.
 

Plan your repayment schedule carefully to minimise the total cost of the loan. If the parents pay the interest cost while the child is studying, that will lower the total cost of the loan. 
 

Default could be disastrous
 

If the student defaults on the loan, the penalties incurred will increase the total loan burden considerably. “Don’t let your credit score take a hit at the start of your career as this will affect your ability to get other loans,” says Shetty. If there is a default, the family member who signed up as the guarantor or co-borrower will be held responsible for repaying the outstanding loan. The pledged asset will be sold off to clear the loan liability.
 

Finally, Dhawan suggests purchasing a term plan to cover the loan amount.