Going for foreign studies this year? Use your education loan wisely

The cost of pursuing education from overseas institutions, already much higher than their Indian peers, witnessed a steep increase in the last few decades. While most large banks and a few non-banking financial companies offer loans for overseas education, large loan amounts and higher restrictions on work visas increase the risk of remaining in debt. This makes it all the more important to carefully analyse the loan features as well as one’s repayment capacity while availing loans for overseas studies.

Loan Amount

Your loan amount should be enough to include your course fee, travel expenses, hostel fee, cost of laptop, books, equipment etc. The loan amount for offshore education courses can go up to Rs 1.5 crore. Try to provide a higher margin for your loan amount to bring down your overall interest cost. Lenders also allow borrowers to use their scholarship or assistantship money as margin contribution.

Repayment period

Just like education loans for domestic institutions, loans availed for taking foreign courses have repayment periods of up to 15 years. The repayment payment for an education loan is calculated from the start of the equated monthly instalment (EMI) repayment, not from the date of loan disbursal. Borrowers are also offered a moratorium period of one year, including the course period, during which they are not required to pay any EMIs. However, the accrual of interest component starts right after the loan disbursal and the accrued interest is added to your principal amount. Hence, those who take education loans should try to repay their accrued interest during the moratorium period. This would help them reduce total interest cost.

Margin money

Margin money refers to the proportion of the course fee not financed through the education loan. The borrower must fund this component from his or her own sources. This amount can include your scholarship or assistantship money, too. Lenders usually do not require any margin money for loan amounts of up to Rs 4 lakh. For loans above Rs 4 lakh, lenders usually require margin money of 15 percent of the cost of pursuing overseas courses.

Rate of interest

Lenders usually offer education loans at a floating rate of interest. The interest rates of loans availed for overseas courses are usually higher than the rate charged for courses pursued in Indian institutes, especially if the overseas institution is one of the premier ones. Currently, education loan interest rates for foreign courses start from around 8 percent per annum onwards, depending on the lender, type of course, institution, academic performance, security offered and the credit score of the borrower/co-applicant. During the moratorium period, lenders levy simple interest on the loan amount. Lenders also offer interest concessions of 1 percent on repaying the interest component during the moratorium period.

Estimate future earnings to calculate EMIs

Analyse the placement history of the chosen education institution and the average pay offered during placements. Also factor in restrictions on work visas, if any, put in by the host country. This would help you to roughly estimate your expected monthly income and accordingly plan your loan tenure and EMI. Don’t opt for an aggressive repayment schedule as non-payment of EMIs would reduce your credit score and eligibility for other loans in future. Remember that one can always prepay loans without any penalty. Take the help of online education loan EMI calculators to find the optimum EMI and loan tenure for your education loan.

Tax benefits

Individuals availing education loans for self, spouse or children or for children placed under guardianship can claim tax deductions under Section 80E of the Income-tax Act. This deduction has no upper cap but can be availed for only eight years from the day of the start of EMI repayment. Hence, borrowers should try to completely repay their education loan within eight years of the start of EMI repayment.

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Collaterals/guarantor of loan

Lenders usually do not insist on collateral or third-party guarantee for education loans of up to Rs 4 lakh. For education loans between Rs 4 lakh and Rs 7.5 lakh, lenders may ask the borrower to provide a third-party guarantor and security. However, some lenders waive the provision of third-party guarantor and security provided the lender is satisfied with the repayment capacity or net worth of the loan applicant/co-borrower. For education loans above Rs 7.5 lakh, lenders may ask for tangible security in the form of property, bank deposit, mutual funds, insurance policies, etc.