The cost of education at foreign institutions, already much higher than its Indian counterparts, has risen sharply in recent decades. While most major banks and some non-bank financial firms offer study abroad loans, large loan amounts and tighter work visa restrictions increase the risk of remaining in debt. This makes it even more important to check the characteristics of the loan and its repayment capacity when using student loans abroad.
Your loan amount should be enough to cover course fees, travel expenses, accommodation expenses, laptops, books, equipment, etc. The loan amount for education courses abroad can be up to Rs 1.5 crore. Try to provide a higher margin on your loan amount to lower your overall interest cost. Lenders also allow borrowers to use their grant or assistant allowance as a contribution margin.
Loans to study abroad, like student loans for domestic institutions, have terms of up to 15 years. Student loan repayment is calculated from the beginning of the equivalent monthly payment (EMI), not from the loan disbursement date. Borrowers are also offered a one-year moratorium, including the course period during which they do not have to pay EMI. However, accrued interest begins immediately after the loan is paid off and accrued interest is added to your principal balance. Therefore, anyone who takes out a student loan must try to pay the increased interest during the moratorium period. This would help them reduce the total cost of interest.
Margin money refers to the portion of tuition that is not funded by the student loan. The borrower must finance this component with its own funds. This amount may also include your scholarship or attendance grant. Lenders generally do not charge margin money for loan amounts up to Rs 4 lakh. For loans above Rs 4 lakh, lenders usually charge a margin of 15% of the cost of attending courses abroad.
Lenders often offer student loans at a variable interest rate. Loan fees for courses abroad are usually higher than fees for courses taken at Indian institutions, especially if the foreign institution is one of the first. Currently, student loan interest rates for study abroad programs start at around 8% per year, depending on the lender, type of program, institution, academic performance, security provided, and creditworthiness of the borrower/ co-applicant. During the moratorium, lenders charge simple interest on the loan amount. Lenders also give a 1% interest discount on the repayment of the interest portion during the moratorium period.
Estimate future earnings to calculate EMI
Analyze the internship history of your chosen educational institution and the average salary offered during internships. Also, consider any work visa restrictions imposed by the host country. This would help you roughly estimate your expected monthly income and plan your payment term and EMI accordingly. Don’t settle for an aggressive payment schedule, as failure to pay EMI will reduce your creditworthiness and your eligibility for other loans in the future. Remember that you can always prepay loans without penalty. Use the online student loan EMI calculators to find the optimal EMI and loan term for your student loan.
Individuals who receive education loans for themselves, their spouse or children, or for custodial children may claim tax deductions under Section 80E of the Income Tax Law. This deduction has no limit, but can only be used for eight years from the date the EMI reimbursement begins. As such, borrowers should aim to pay off their student loans in full within eight years of the start of the EMI payment.
Lenders generally do not require collateral or third party guarantees for student loans up to Rs 4 lakh. For educational loans between Rs 4 lakh and Rs 7.5 lakh, lenders may require the borrower to provide a third party guarantor and collateral. However, some lenders will refrain from providing a third-party guarantor and collateral unless the lender is satisfied with the loan applicant/co-borrowers ability to repay or net worth. For student loans above Rs 7.5 lakh, lenders may require tangible collateral in the form of property, bank deposits, mutual funds, insurance policies, etc.